The intensity of incentives in firms and markets: Moral hazard with envious agents

Abstract

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

The impact of envy on relational employment contracts

“…This result is in line with the literature, see e.g. Bartling and von Siemens (2007) and Grund and Sliwka (2005).…”

“…However, to ensure participation, the principal has to pay the inequity averse agents a premium to compensate them for the faced risk of unequal payoffs (inequity premium). In this kind of framework, agency costs increase in the presence of inequity aversion as reported by, e.g., Bartling and von Siemens (2007) and Grund and Sliwka (2005). 7 Both results are true for our model as long A c c e p t e d M a n u s c r i p t as only one period is considered.…”

Inequality at Work: The Effect of Peer Salaries on Job Satisfaction

“…Forcing employers to disclose the salary of all workers would result in a decline in aggregate utility for employees, holding salaries constant. However, it is possible that forcing an employer to disclose the salary of all workers may ultimately result in an endogenous change in wages and worker mix, that could ultimately affect the distribution of wages as in the models of Frank (1984), Bewley (1999), or Bartling and von Siemens (2010b Notes: Assignment was based on name/email and department information contained in online directories. Sample sizes reflect number of valid email addresses extracted from directories.…”

The causes and economic consequences of envy

“…Teyssier (2008) provides an experimental test for the theory in her previous paper. Kosfeld andvon Siemens (2009), von Siemens (2009) and Bartling and Von Siemens (2010) also study how interdependent preferences create an incentive for agents to self-select into different firms.…”