Unilateral Envy, Pay Inversion, and the Cost of Age Diversity

ABSTRACT Research shows that older people are more likely to be envious of their younger peers than the other way around. I analyze how such unilateral envy affects optimal incentive contracts for young and old agents. I show that the optimal contracts can be characterized by pay inversion: The principal offers a higher expected wage to the young agent than to the old agent. Further, I show that the principal is generally worse off with unilaterally envious agents than with bilaterally envious ones. I discuss the implications of these findings.