The Impact of Envy on Relational Employment Contracts

We study the effects of envy on relational employment contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which reflects an agent's individual contribution to firm value. Both agents exhibit horizontal disadvantageous inequity aversion. In contrast to the literature, we find that inequity aversion may be beneficial; in the presence of envy, for a certain range of interest rates, relational contracts may be more profitable. For some interest rates reputational equilibria exist only with envious agents.

[1]  George P. Baker,et al.  Subjective Performance Measures in Optimal Incentive Contracts , 1993 .

[2]  W. MacLeod,et al.  Implicit Contracts, Incentive Com-patibility, and Involuntary Unemployment , 1989 .

[3]  E. Fehr.  A Theory of Fairness, Competition and Cooperation , 1998 .

[4]  Jonathan Levin.  Relational Incentive Contracts , 2003 .

[5]  Gary E. Bolton,et al.  ERC: A Theory of Equity, Reciprocity, and Competition , 2000 .

[6]  E. Fehr,et al.  Reciprocity as a contract enforcement device: experimental evidence , 1997 .

[7]  Armin Falk,et al.  A Theory of Reciprocity , 2001, Games Econ. Behav..

[8]  L. Thompson,et al.  Social Utility and Decision Making in Interpersonal Contexts , 1989 .

[9]  Björn Bartling,et al.  The Intensity of Incentives in Firms and Markets: Moral Hazard With Envious Agents , 2009 .

[10]  A. Isaksson,et al.  Preferences for redistribution - a cross-country study in fairness , 2007 .

[11]  Claude Fluet,et al.  Group vs. Individual Performance Pay When Workers Are Envious , 2003 .

[12]  C. Bull.  The Existence of Self-Enforcing Implicit Contracts , 1987 .

[13]  E. Fehr,et al.  Gift Exchange and Reciprocity in Competitive Experimental Markets , 1995 .

[14]  B. Moldovanu,et al.  Contests for Status , 2005, Journal of Political Economy.

[15]  T. Bewley.  Why not cut pay , 1998 .

[16]  Dirk Sliwka,et al.  Envy and Compassion in Tournaments , 2002, SSRN Electronic Journal.

[17]  A. Okun.  The Invisible Handshake and the Inflationary Process , 1980 .

[18]  G. Corneo.  Inequality and the State: Comparing U.S. And German Preferences , 2000, SSRN Electronic Journal.

[19]  E. Lazear.  Pay Equality and Industrial Politics , 1989, Journal of Political Economy.

[20]  L. Berkowitz,et al.  Reciprocity and responsibility reactions to prior help. , 1966, Journal of personality and social psychology.

[21]  Claude Fluet,et al.  Inequity Aversion in Tournaments , 2003 .

[22]  Anja Schöttner,et al.  Relational Contracts, Multitasking, and Job Design , 2007 .

[23]  Jonathan Levin,et al.  Multilateral Contracting and the Employment Relationship , 2002 .

[24]  Bengt Holmstrom,et al.  Contractural Models of the Labor Market , 1980 .

[25]  Jenny Kragl.  Group vs. Individual Performance Pay in Relational Employment Contracts when Workers Are Envious , 2010 .

[26]  A. Alesina,et al.  Inequality and Happiness: Are Europeans and Americans Different? , 2001 .

[27]  Oliver Hart,et al.  Norms and the Theory of the Firm , 2001 .

[28]  Joyce E. Berg,et al.  Trust, Reciprocity, and Social History , 1995 .

[29]  M. Rabin.  Published by: American , 2022 .

[30]  Kevin J. Murphy,et al.  Relational Contracts and the Theory of the Firm , 1997 .

[31]  A. Oswald,et al.  Does Wage Rank Affect Employees Well-Being? , 2005 .

[32]  M. Kräkel.  Emotions in tournaments , 2008 .

[33]  Ernst Fehr,et al.  Reciprocity as a Contract Enforcement Device , 2001 .

[34]  Trond E. Olsen,et al.  Team Incentives in Relational Employment Contracts , 2005, Journal of Labor Economics.

[35]  E. Lazear,et al.  Rank-Order Tournaments as Optimum Labor Contracts , 1979, Journal of Political Economy.

[36]  C. Moriguchi.  Implicit Contracts, the Great Depression, and Institutional Change: A Comparative Analysis of U.S. and Japanese Employment Relations, 1920–1940 , 2003, The Journal of Economic History.