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Optimal incentive contracts under relative income concerns

Content Provider	Springer Nature Link
Author	Goukasian, Levon Wan, Xuhu
Copyright Year	2010
Abstract	We are studying in this article an interplay between workers in organizations under the assumption that workers exhibit behavioral biases: envy, jealousy, or admiration toward the other coworkers’ compensation. We assume workers care about their relative position, and we study the impact of this assumption on their efforts and on their optimal incentive contracts. We explicitly solve for the optimal incentive contract of moral hazard a la Holmstrom and Milgrom (Econometrica 55:303–328, 1987). We model team production by agents in which each agent’s effort generates an observable signal and depends on efforts of other agents. One of the important findings is that an agent’s optimal effort is negatively impacted by the behavioral biases in other agents’ judgments. We also show envious behavior is destructive for organizations. Consistent with Tirole (Econometrica 69(1):1–35, 2001), our findings suggest that in the presence of agency problems induced by envy or jealousy, the optimal compensation exhibits high pay-for-performance sensitivity.
Starting Page	57
Ending Page	86
Page Count	30
File Format	PDF
ISSN	18629679
Journal	Mathematics and Financial Economics
Volume Number	4
Issue Number	1
e-ISSN	18629660
Language	English
Publisher	Springer-Verlag
Publisher Date	2010-11-24
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Multi-agent problems Hidden action Envy Jealousy Behavioral Contract Theory Optimal effort Pay-for-performance sensitivity Game Theory/Mathematical Methods Statistics for Business/Economics/Mathematical Finance/Insurance Applications of Mathematics Quantitative Finance Financial Economics Finance /Banking
Content Type	Text
Resource Type	Article
Subject	Finance Statistics and Probability Statistics, Probability and Uncertainty

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