Abstract
Abstract Traditionally in economics the actions of agents have been viewed as driven exclusively by individuals' interest in their own wealth. Nonetheless experimental evidence shows that agents enjoy being richer than their peers or, in other words, agents are interested in their status within a group. In this work I derive the optimal linear contract in a moral hazard problem where agents are risk averse and are concerned about how much they are compensated relative to their colleagues. I show that in the presence of such relative wealth concerns: 1.) It is optimal for the principal to offer a compensation schedule linked to the overall firm or team performance, even when each agent's performance is observable, contractible and independent on the actions taken by his/her colleagues; 2.) Relative Performance Evaluation is less desirable for the principal.
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