Abstract
While most market transactions are subject to strong incentives, transactions within firms are often not incentivized. We offer an explanation for this observation based on envy among agents in an otherwise standard moral hazard model with multiple agents. Envious agents suffer if other agents receive a higher wage due to random shocks to their performance measures. The necessary compensation for expected envy renders incentive provision more expensive, which generates a tendency towards flat-wage contracts. Moreover, empirical evidence suggests that social comparisons like envy are more pronounced among employees within firms than among individuals who interact only in the market. Flat-wage contracts are thus more likely to be optimal in firms than in markets.
Item Type: | Paper |
---|---|
Keywords: | envy, moral hazard, flat-wage contracts, within-firm vs. market interactions |
Faculties: | Economics Economics > Munich Discussion Papers in Economics Economics > Munich Discussion Papers in Economics > Micro-Economics Economics > Munich Discussion Papers in Economics > Industrial Organization |
Subjects: | 300 Social sciences > 300 Social sciences, sociology and anthropology 300 Social sciences > 330 Economics |
JEL Classification: | D82, J3, M5 |
URN: | urn:nbn:de:bvb:19-epub-913-9 |
Language: | English |
Item ID: | 913 |
Date Deposited: | 10. Apr 2006 |
Last Modified: | 05. Nov 2020, 11:21 |