Envy in the workplace

•I study an adverse selection model when there is envy towards boss and colleagues.•Envy never distorts the effort of the high-productivity employees.•Envy towards a colleague distorts the effort of the low-productivity employees.•This distortion is mitigated when employees also envy their boss.•I shed light on the complementarity between these two forms of envy.

Envy affects the optimal employment contract offered to employees with different productivity. The employees' envy towards colleagues distorts the effort exerted by the less productive employees. However, this distortion is mitigated when employees are also envious towards their boss.