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


Bartling, Björn; Von Siemens, Ferdinand A (2010). The intensity of incentives in firms and markets: Moral hazard with envious agents. Labour Economics, 17(3):598-607.

Abstract

While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. This paper offers an explanation for this observation based on the assumption that agents are envious and suffer utility losses if others receive higher wages. We analyze the impact of envy on optimal incentive contracts in a general moral hazard model and isolate the countervailing effects of envy on the costs of providing incentives. We show that envy creates a tendency towards flat-wage contracts 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 then more likely to be optimal in firms.

Abstract

While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. This paper offers an explanation for this observation based on the assumption that agents are envious and suffer utility losses if others receive higher wages. We analyze the impact of envy on optimal incentive contracts in a general moral hazard model and isolate the countervailing effects of envy on the costs of providing incentives. We show that envy creates a tendency towards flat-wage contracts 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 then more likely to be optimal in firms.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:June 2010
Deposited On:18 Jan 2010 14:19
Last Modified:17 Feb 2018 16:48
Publisher:Elsevier
ISSN:0927-5371
OA Status:Green
Publisher DOI:https://doi.org/10.1016/j.labeco.2009.10.002

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