Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86527
Authors: 
Dur, Robert
Glazer, Amihai
Year of Publication: 
2004
Series/Report no.: 
Tinbergen Institute Discussion Paper 04-046/1
Abstract: 
A worker's utility may increase with his income, but envy can make his utility decline with his employer's income. This article uses a principal-agent model to study profit-maximizing contracts when a worker envies his employer. Envy tightens the worker's participation constraint and so calls for higher pay and/or a softer effort requirement. Moreover, a firm with an envious worker can benefit from profit sharing, even when the worker's effort is fully contractible. We discuss several applications of our theoretical work: envy can explain why a lower-level worker is awarded stock options, why incentive pay is lower in nonprofit organizations, and how governmental production of a good can be cheaper than private production.
Subjects: 
Principal-agent
Envy
Compensation
Contracts
Profit-sharing
Stock options
Public vs. private production
JEL: 
D23
J31
J33
M52
Document Type: 
Working Paper

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