Endogenous Status Concerns in Agency

I consider a simple linear principal-agent model with one principal and two agents and explore the rationality and efficiency of endogenous status concerns on the part of the agents. Following CasadesusMasanell (2004), I assume that status concerns have no real utility value and posit that status concerns are chosen to maximise only material utility. First, I find that status concerns cannot improve upon the standard model with atomistic agents; when status concerns are chosen efficiently, the model that takes social preferences into account gives the same results as does the standard model with atomistic agents. Second, when agents can costlessly choose their own status concerns, it is in their individual interests to display a preference for status. However, they do not, in general, choose the efficient levels of status concerns, i.e., total surplus within the firm is reduced. These findings are robust to different formulations of status concerns.