(Job Market Paper)
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Abstract
Zapatero, participants to the FMA doctoral student consortium for their helpful comments and suggestions. In this paper I show that if risk-averse agents prefer both to be richer in absolute terms and to be richer than their peers (relative-wealth concerns), then 1) they will prefer positive correlation between their payo s and the payo s of other agents, and 2) they will be averse to negative correlation between payo s. I test these theoretical predictions in a laboratory experiment. I nd that subjects prefer positively correlated payo s over risk-free and negatively correlated payo s. Furthermore, subjects who by observing other participants ' payo s signal stronger relative-wealth concerns, also show stronger aversion to negatively correlated payo s. Finally, women appear to be concerned about other agents ' payo s more than men. This novel evidence has implications that help explain why rms apparently use pro t-sharing and broad-based incentives contracts too extensively, and why Relative Performance Evaluation (RPE) contracts are scarcely used in common compensation practice. 2