Optimal Contracts When Agents Envy Each Other
51 Pages Posted: 16 Aug 2005
Date Written: August 4, 2005
Abstract
We examine the characteristics of endogenously-determined optimal incentive contracts for agents who envy each other and work for a risk-neutral (non-envious) principal. Envy makes each agent care not only about absolute consumption but also about relative consumption. Incentive contracts in this setting display properties strikingly different from those associated with optimal contracts in standard principal-agent theory. We derive results that help explain some of the discrepancies between the predictions of principal-agent theory and the stylized facts about real-world contracts.
Keywords: Principal-Agent, Optimal Contracts, Envy, Corporate Governance
JEL Classification: D63, D82, G30, G34, M52
Suggested Citation: Suggested Citation
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