Equity theory in psychology, observed responses to reform in socialist countries, and studies in the field of organizational behaviour all suggests that envy can play an important role in economic behaviour. This paper incorporates envy into the standard economic choice framework. The model provides a natural extension of the theory of equity in psychology. It is used to analyze how agents' innovating, retaliating, sabotaging, and sharing behaviour are jointly determined by legal institutions and agents' propensities for envy. Implications for the economics of organization and the reform of socialist economies are discussed.
- Legal institutions