“Endogenous” Relative Concerns: The Impact of Workers’ Characteristics on Status, Profits and Diversity in the Firm∗

This paper shows that it is individually rational for agents in a firm to develop and exhibit status concerns. Workers are, by their choices of status concerns, able to transfer surplus from the the firm to themselves. As expected, relative concerns are shaped by the relative strengths and weaknesses of the workers in the firm. Surprisingly, a firm’s profit is reduced relative to the benchmark moralhazard model; workers design their social preferences in a way that exploits the substitutability of status and explicit contracts in their favor. An implication of the relative nature of status concerns is that a firm would want to hire a homogeneous workforce if and only if it could hire workers of high ability. JEL Classifications: M52, M51, D86, L14, Z13