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We provide an explanation for why both college tuition and government grants to college students are typically means-tested. The critical idea is that attending college is both an investment good and a consumption good. The consumption benefit from education implies that, when tuition and grants are uniform, the marginal rich student is less smart than some poor people who choose not to attend college, thus reducing the social returns to education and increasing the college's cost of education. Competition in the market for college education results in means-tested tuition. In addition, to maximize the social returns to education government should means-test grants. We thus provide a rationale for means-tested tuition and grants which relies neither on capital market imperfections nor on redistributive objectives.

A worker's utility may increase in his own income, but envy can make his utility decline with his employer's income. Such behavior may call for high-powered incentives, so that increased effort by the worker little increases the income of his employer. This paper employs a principal-agent model to study optimal incentive contracts for envious workers under various assumptions about the object and generality of envy. Envy amplifies the effect of incentives on effort and, therefore, increases optimal incentive pay. Moreover, envy can make profit-sharing optimal, even when the worker's effort is fully contractible. We discuss several applications of our theoretical work. For example, envy can explain why lower-level workers are awarded stock options, why incentive pay is usually lower in non-profit organizations, and higher in larger firms. Envy may also make governmental production of a good more efficient than private production.

A firm may induce voters or elected politicians to support a policy it favors by suggesting that it is more likely to invest in a district whose voters or representatives support the policy. In equilibrium, no one vote may be decisive, and the policy may gain strong support though the majority of districts suffer from adoption of the program. When votes reveal information about the district, the firm's implicit promise or threat can be credible.