Optimal Contracts When a Worker Envies His Boss

Download or read book Optimal Contracts When a Worker Envies His Boss written by Robert Dur and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.