Envy Taxonomy

The goal of this paper is to analyze how taxes affect the principal-agent relationship when the worker envies his boss. To do this, an income- and a corporate tax rate are added to a piece rate model where the agent loses utility when the principal earns more than him. Envy is found to increase productivity, as long as risk is not too high. Furthermore, I show that if risk is low or the bonus high, both types of taxes decrease worker productivity. But if risk is high, this conventional wisdom might not hold true. The results imply that it may be desirable for the government to install a higher corporate tax rate.