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Performance pay, trade and inequality

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  • Pupato, Germán

Abstract

This paper introduces moral hazard into a general equilibrium model with heterogeneous firms to study wage inequality between homogeneous workers. Optimal performance pay contracts yield non-degenerate wage distributions among co-workers, enabling the analysis of two conceptually distinct and empirically relevant dimensions of wage dispersion: between-firm and within-firm inequality. The latter remains virtually unexplored in the literature. As an application, I characterize analytically the impact of trade liberalization on within-firm inequality, highlighting a new channel through which international trade can contribute to residual wage dispersion. To motivate the theory, I show that the model is consistent with cross-firm empirical patterns in residual wage dispersion and performance pay using nationally representative, matched employer–employee data from Canada.

Suggested Citation

  • Pupato, Germán, 2017. "Performance pay, trade and inequality," Journal of Economic Theory, Elsevier, vol. 172(C), pages 478-504.
    • Handle: RePEc:eee:jetheo:v:172:y:2017:i:c:p:478-504
    DOI: 10.1016/j.jet.2017.10.001
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    More about this item

    Keywords

    Performance pay; Within-firm wage inequality; Moral hazard; Firm heterogeneity; Trade liberalization;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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