Envy in Mission-Oriented Organizations

According to the labor donation theory, workers adhering to their firms' mission are willing to donate a portion of their paid labor. In this paper, we study how workers' fairness con- cerns limit the firm's ability to extract labor donation from its employees. We find that, in sectors where the firm's mission is important, optimal contracts are such that high-ability employees perceive their wage as less fair than low-ability employees and they must be re- warded with an "envy rent". The opposite is true in sectors where the firm's mission does not play a relevant role. We empirically test the predictions of the model using the German Socio-Economic Panel finding support for our theoretical results.