Contracting with Agents Seeking Status

We explore in this paper the consequences of status seeking preferences among agents contracting with a private principal in the context of production. We examine in particular the case of envy and we show that in general envy entails augmented distortions due to asymmetric information in optimal contracts. Furthermore if the principal neglects the preferences of the agents with respect to status, then potentially there is under-participation to the contract. We also show that if the principal is free to choose who can participate to the contract, then under some conditions the principal may prefer to contract with only a subset of potentially "profitable" agents (that is where his utility is strictly positive). We then ask whether contracting with agents seeking status would yield to more incentives to exert unobservable effort. We actually show that the principal has incentives to discourage effort. In the last part of the paper, we consider the case of costly observation of private decisions so that we investigate whether envy encourages non compliance or not