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Does wage justice hamper creativity? Pay gap and firm innovation in China

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  • Xu, Mingli
  • Kong, Gaowen
  • Kong, Dongmin

Abstract

Although the pay gap between executives and employees has received considerable attention, its economic consequences remain unclear due to the unavailability of data. In this study, we examine the effects of the pay gap on firm innovation by using data from Chinese listed firms. We show that: 1) the first-order effect of pay gap on firm innovation is significantly positive, supporting the tournament theory; 2) however, when pay gap is relatively high, the importance of comparison theories increases; 3) high management pay premiums provide incentives for management to devote to innovation activities, while pay premiums for ordinary employees impede firm innovation; and 4) both the employee's human capital and state ownership play significant roles in the negative effects of employee pay premiums on firm innovation. Overall, we provide critical insights and a serious challenge for regulators in China. The policy implications of this study could be of interest to regulators who intend to encourage firm innovation.

Suggested Citation

  • Xu, Mingli & Kong, Gaowen & Kong, Dongmin, 2017. "Does wage justice hamper creativity? Pay gap and firm innovation in China," China Economic Review, Elsevier, vol. 44(C), pages 186-202.
    • Handle: RePEc:eee:chieco:v:44:y:2017:i:c:p:186-202
    DOI: 10.1016/j.chieco.2017.04.003
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    More about this item

    Keywords

    Pay gap; Innovation; Pay premium; Human capital; Ownership;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies
    • G3 - Financial Economics - - Corporate Finance and Governance

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