Status Concerns and Firm Profitability: Can a firm profit from the competitive nature of its employees?

If workers have concerns for local status, it seems plausible that firms can increase their profits by exploiting the competitive nature of their employees. This paper shows, contrary to expectations, that firms may not be able to do that; in fact, firm profits are reduced by the workers’ choices of relative concerns. In doing so, this paper also offers an explanation for why agents might exhibit concerns for relative position. Workers design their social preferences in a way that exploits the substitutability of status and explicit contracts in their favour. The firm is forced to offer higher wages or to require lower effort, thus lowering profits. By their choices of relative concerns, workers are able to effect a transfer of surplus from the firm to themselves and, thus, increase their “material utilities”. The firm’s profits are maximized when workers do not have relative concerns of any kind. The firm can achieve this by hiring workers who are identical in all respects. JEL Classifications: M52, M51, D86, L14