IDEAS home Printed from https://ideas.repec.org/p/tin/wpaper/20040046.html
   My bibliography  Save this paper

Optimal Incentive Contracts when Workers envy their Boss

Author

Listed:
  • Robert Dur

    (Department of Economics, Erasmus Universiteit Rotterdam)

  • Amihai Glazer

    (Department of Economics, University of California, Irvine, California, USA)

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. This discussion paper has resulted in a publication in the Journal of Law, Economics and Organization . (2008, 24(1), 120-138.)

Suggested Citation

  • Robert Dur & Amihai Glazer, 2004. "Optimal Incentive Contracts when Workers envy their Boss," Tinbergen Institute Discussion Papers 04-046/1, Tinbergen Institute, revised 13 Jun 2006.
    • Handle: RePEc:tin:wpaper:20040046
    as

    Download full text from publisher

    File URL: https://papers.tinbergen.nl/04046.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Pedro Rey‐Biel, 2008. "Inequity Aversion and Team Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 297-320, June.
    2. Oyer, Paul & Schaefer, Scott, 2005. "Why do some firms give stock options to all employees?: An empirical examination of alternative theories," Journal of Financial Economics, Elsevier, vol. 76(1), pages 99-133, April.
    3. Bartling, Björn & von Siemens, Ferdinand A., 2010. "The intensity of incentives in firms and markets: Moral hazard with envious agents," Labour Economics, Elsevier, vol. 17(3), pages 598-607, June.
    4. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    5. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 817-868.
    6. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    7. Brainerd, Elizabeth, 2002. "Five Years after: The Impact of Mass Privatization on Wages in Russia, 1993-1998," Journal of Comparative Economics, Elsevier, vol. 30(1), pages 160-190, March.
    8. Timothy Besley & Maitreesh Ghatak, 2005. "Competition and Incentives with Motivated Agents," American Economic Review, American Economic Association, vol. 95(3), pages 616-636, June.
    9. Josse Delfgaauw & Robert Dur, 2008. "Incentives and Workers’ Motivation in the Public Sector," Economic Journal, Royal Economic Society, vol. 118(525), pages 171-191, January.
    10. Abhijit V. Banerjee, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1289-1332.
    11. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    12. Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," European Economic Review, Elsevier, vol. 44(4-6), pages 1057-1068, May.
    13. Christian Grund & Dirk Sliwka, 2005. "Envy and Compassion in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 187-207, March.
    14. Dominique Demougin & Claude Fluet & Carsten Helm, 2006. "Output and wages with inequality averse agents," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(2), pages 399-413, May.
    15. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    16. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
    17. repec:bla:scandj:v:97:y:1995:i:2:p:295-307 is not listed on IDEAS
    18. Englmaier, Florian & Wambach, Achim, 2010. "Optimal incentive contracts under inequity aversion," Games and Economic Behavior, Elsevier, vol. 69(2), pages 312-328, July.
    19. Hideshi Itoh, 2004. "Moral Hazard and Other‐Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45, March.
    20. Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, vol. 78(3), pages 275-299, November.
    21. Agell, Jonas & Lundborg, Per, 1992. "Fair wages, involuntary unemployment and tax policies in the simple general equilibrium model," Journal of Public Economics, Elsevier, vol. 47(3), pages 299-320, April.
    22. Delfgaauw, Josse & Dur, Robert, 2007. "Signaling and screening of workers' motivation," Journal of Economic Behavior & Organization, Elsevier, vol. 62(4), pages 605-624, April.
    23. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    24. Stephen Erfle & Henry McMillan, 1990. "Media, Political Pressure, and the Firm: The Case of Petroleum Pricing in the Late 1970s," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 115-134.
    25. repec:bla:econom:v:60:y:1993:i:238:p:161-81 is not listed on IDEAS
    26. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    27. Frank, Robert H, 1984. "Are Workers Paid Their Marginal Products?," American Economic Review, American Economic Association, vol. 74(4), pages 549-571, September.
    28. Avinash Dixit, 2002. "# Incentives and Organizations in the Public Sector: An Interpretative Review," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 696-727.
    29. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
    30. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    31. Olmstead, Alan L & Rhode, Paul, 1985. "Rationing without Government: The West Coast Gas Famine of 1920," American Economic Review, American Economic Association, vol. 75(5), pages 1044-1055, December.
    32. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Robert Dur & Amihai Glazer, 2004. "Optimal Incentive Contracts For a Worker Who Envies His Boss," CESifo Working Paper Series 1282, CESifo.
    2. Rebitzer, James B. & Taylor, Lowell J., 2011. "Extrinsic Rewards and Intrinsic Motives: Standard and Behavioral Approaches to Agency and Labor Markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 8, pages 701-772, Elsevier.
    3. Bental, Benjamin & Kragl, Jenny, 2021. "Inequality and incentives with societal other-regarding preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 1298-1324.
    4. Yingchao Zhang & Oliver Fabel & Christian Thomann, 2015. "Pay inequity effects on back-office employees’ job performances: the case of a large insurance firm," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 421-439, June.
    5. Kragl, Jenny & Gogova, Martina, 2013. "Wage Bargaining when Workers Have Fairness Concerns," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79790, Verein für Socialpolitik / German Economic Association.
    6. Gill, David & Stone, Rebecca, 2010. "Fairness and desert in tournaments," Games and Economic Behavior, Elsevier, vol. 69(2), pages 346-364, July.
    7. Nikiforakis, Nikos & Oechssler, Jörg & Shah, Anwar, 2019. "Managerial bonuses and subordinate mistreatment," European Economic Review, Elsevier, vol. 119(C), pages 509-525.
    8. Bartling, Björn, 2011. "Relative performance or team evaluation? Optimal contracts for other-regarding agents," Journal of Economic Behavior & Organization, Elsevier, vol. 79(3), pages 183-193, August.
    9. Cato, Susumu & Ebina, Takeshi, 2014. "Inequality aversion in long-term contracts," MPRA Paper 59893, University Library of Munich, Germany.
    10. Markus Brunner & Kai Sandner, 2012. "Social comparison, group composition, and incentive provision," International Journal of Game Theory, Springer;Game Theory Society, vol. 41(3), pages 565-602, August.
    11. Dominik Erharter, 2012. "Credence goods markets, distributional preferences and the role of institutions," Working Papers 2012-11, Faculty of Economics and Statistics, Universität Innsbruck.
    12. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    13. Biao Luo & Chengyuan Wang & Tieshan Li, 2018. "Inequity-averse agents’ deserved concerns under the linear contract: a social network setting," Annals of Operations Research, Springer, vol. 268(1), pages 129-148, September.
    14. Bartling, Björn & von Siemens, Ferdinand A., 2010. "The intensity of incentives in firms and markets: Moral hazard with envious agents," Labour Economics, Elsevier, vol. 17(3), pages 598-607, June.
    15. Gill, David & Stone, Rebecca, 2009. "Fairness and desert in tournaments," Discussion Paper Series In Economics And Econometrics 0903, Economics Division, School of Social Sciences, University of Southampton.
    16. Linde, Jona & Sonnemans, Joep, 2015. "Decisions under risk in a social and individual context: The limits of social preferences?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 56(C), pages 62-71.
    17. Livio, Luca & De Chiara, Alessandro, 2019. "Friends or foes? Optimal incentives for reciprocal agents," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 245-278.
    18. Englmaier, Florian & Wambach, Achim, 2010. "Optimal incentive contracts under inequity aversion," Games and Economic Behavior, Elsevier, vol. 69(2), pages 312-328, July.
    19. Gürtler, Marc & Gürtler, Oliver, 2012. "Inequality aversion and externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 111-117.
    20. Koji Abe & Hajime Kobayashi & Hideo Suehiro, 2014. "Leadership in the Prisoner's Dilemma with Inequity-Averse Preferences," Discussion Papers 2014-09, Kobe University, Graduate School of Business Administration.

    More about this item

    Keywords

    Principal-agent; Envy; Compensation; Contracts; Profit-sharing; Stock options; Public vs. private production;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tin:wpaper:20040046. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tinbergen Office +31 (0)10-4088900 (email available below). General contact details of provider: https://edirc.repec.org/data/tinbenl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.