While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. We offer an explanation for this observation based on the assumption that agents are envious and suffer utility losses if colleagues receive higher wages. We show that envy creates a tendency towards flat-wages if agents are risk-averse and there is no limited liability. Empirical evidence suggests that social comparisons are more pronounced among employees within firms than among individuals that interact in markets. Flat-wage contracts are thus more likely to be optimal in firms. Further, the paper analyzes in general the impact of envy on optimal incentive contracts for multiple agents and isolates the countervailing effects of envy on the costs of providing incentives.JEL Classification: D82, J3, M5

Cooperation between workers can be of substantial value to a firm, yet its level often varies substantially between firms. We show that these differences can unfold in a competitive labor market if workers have heterogeneous social preferences and preferences are private information. In our model, workers differ in their willingness to cooperate voluntarily. We show that there always exists a separating equilibrium in which workers self‐select into firms that differ in their monetary incentives as well as their level of worker cooperation. Our model highlights the role of sorting and worker heterogeneity in the emergence of heterogeneous corporate cultures. It also provides a new explanation for the coexistence of nonprofit and for‐profit firms. “Here you don’t communicate. And sometimes you end up not knowing things. … Everyone says we need effective communication. But it’s a low priority in action. … The hardest thing at the gates when flights are delayed is to get information.” “There is constant communication between service and the ramp. When planes have to be switched and bags must be moved, customer service will advise the ramp directly or through operations. If there’s an aircraft swap operations keeps everyone informed. … It happens smoothly.”

Partnerships are the prevalent organizational form in many industries. Most partnerships share profits equally among the partners. Following Kandel and Lazear (1992) it is often argued that "peer pressure" mitigates the arising free-rider problem. This line of reasoning takes the equal sharing rule as exogenously given. The purpose of our paper is to show that with inequity averse partners -a behavioral assumption akin to peer pressure -the equal sharing rule arises endogenously as an optimal solution to the incentive problem in a partnership.JEL Classification: D20, D86, J54

Numerous survey studies report that human resource managers curb wage inequality with the intent to avoid detrimental effects on workers' morale. However, there exists little controlled empirical evidence demonstrating that horizontal social comparisons and wage inequality have adverse effects on worker behavior. In this paper, we present data from a laboratory experiment that studies the impact of wage inequality on participation and effort choices in team production. Overall, we do not find evidence that wage inequality has a significant impact on either participation or effort choices. Numerous survey studies report that human resource managers curb wage inequality with the intent to avoid detrimental effects on workers' morale. However, there exists little controlled empirical evidence demonstrating that horizontal social comparisons and wage inequality have adverse effects on worker behavior. In this paper, we present data from a laboratory experiment that studies the impact of wage inequality on participation and effort choices in team production. Overall, we do not find evidence that wage inequality has a significant impact on either participation or effort choices.JEL Classification: D20, D86, J54

In this laboratory experiment we study the use of strategic ignorance to delegate real authority within a firm. A worker can gather information on investment projects, while a manager makes the implementation decision. The manager can monitor the worker.This allows her to exploit any information gathered by the worker, but also reduces the worker's incentives to gather information in the first place. Both e↵ects are influenced by the interest alignment between manager and worker. Our data confirm the prediction that optimal monitoring depends non-monotonically on the interest alignment between managers and workers. Managers also show some preferences for control that seem to be driven by loss aversion. We also find mild evidence for hidden benefits and costs of control. However, behavioral biases have only limited e↵ects on organizational outcomes. JEL: D20, D40, D63, D82, J30In a variety of strategic situations, more information may hurt an individual. The underlying intuition is that if it is commonly known that an individual gathers more information, this may change the behavior of other individuals. This change in behavior can be detrimental to the better informed individual. Consequently, rational individuals might stay ignorant for strategic reasons. One organizational issue where strategic ignorance is likely to play an important role is the e↵ective delegation of decision rights. This argument is developed in a pioneering contribution by Aghion and Tirole (1997) and explored further in Baker, Gibbons, and Murphy (1999). In Aghion and Tirole a worker fears to be overruled by his manager if the latter is well-informed about the consequences of some operational decisions. This fear thwarts the worker's incentives to gather information. An uninformed manager can credibly commit not to overrule, since she does not know the most appropriate operational decision.Realizing that his preferred decision will be implemented, the worker has stronger incentives to gather information. Strategic ignorance can thus be a crucial tool to delegate e↵ective control over decisions -called real authority -to lower level employees.The argument is compelling from a theoretical point of view, yet empirical evidence on the underlying strategic mechanism is scarce. Moreover, practitioners, the popular business press, and many studies on monetary incentives and control indeed suggest that Aghion and Tirole might ignore important behavioral biases of both managers and workers.Regarding managers, anecdotal evidence paints the picture that many individuals are overly reluctant to delegate decision rights. The negative consequence of such preferences for control are reflected in management advice like Manzoni andBarsoux (1998) andHerzberg (2003).Rather than emphasizing the perils of lost control, this management literature warns for the negative consequences of "micromanagement." The problem of excess centralization has been discussed at least since Williamson (1996, pp.150-151) who comments on the connection between managerial meddling...