I compare group to individual performance pay when workers are envious and performance is non-verifiable. Avoiding payoff inequity, the group bonus contract is superior as long as the firm faces no credibility problem. The individual bonus contract may, however, become superior albeit...

In many countries wages are set by collective agreements. Such agreements tend to impose wage equality among the a⁄ected workers. We use a moral-hazard environment with two inferiority-averse workers who di⁄er in their productivities but are otherwise identical. In this setting, we analyze...

We analyze optimal labor contracts when the worker is inequity averse towards the employer. Welfare is maximized for an equal sharing rule of surplus between the worker and the firm. That is, profit sharing is optimal even if effort is contractible. If the firm can make a take-it-or leave-it...

In a moral-hazard environment, I compare the profitabilities of a rank-order tournament and independent bonus contracts when a firm employs two envious workers whose individual performances are not verifiable. Whereas the bonus scheme must then be self-enforcing, the tournament is contractible....

We analyze the optimal combination of promotion tournaments and linear individual performance pay in an employment relationship. An agent's effort is non-observable and he has private information about his suitability for promotion. Thus, the two incentive schemes need to be combined to serve...