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Subsidizing Consumption to Signal Quality of Workers

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  • Bruno De Borger

    () (Department of Economics, University of Antwerp)

  • Amihai Glazer

    () (Department of Economics, University of California-Irvine)

Abstract

A firm whose profits increase when outsiders believe that it pays high wages may induce its workers to over-consume goods that signal high compensation. One implication is that firms may lobby government to subsidize fringe benefits with high signaling value, such as company cars, to their employees. We show that under plausible conditions the provision of fringe benefits indeed can signal the firm's type. Moreover, we demonstrate the existence of multiple equilibria---one equilibrium has no firm providing certain fringe benefits, whereas another equilibrium has fringe benefits signal the firm's type. The paper further shows that a firm that provides the fringe benefit may oppose a government subsidizing it too heavily, because a large subsidy could destroy the signaling value of the benefit. The analysis shows that an employer may even provide a fringe benefit to employees who place no value on it. Our results are consistent with many stylized facts on the provision of fringe benefits by firms. More generally, we the model highlights how and why a firm may engage in behavior which signals the type of workers it hires.

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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101101.

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Length: 37 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:irv:wpaper:101101

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Keywords: Signaling; Fringe benefits; Compensation;

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  1. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
  2. Eva Gutiérrez-i-Puigarnau & Jos van Ommeren, 2007. "Welfare Effects of Distortionary Company Car Taxation," Tinbergen Institute Discussion Papers 07-060/3, Tinbergen Institute, revised 20 Mar 2009.
  3. Paul Oyer, 2005. "Salary or Benefits?," NBER Working Papers 11817, National Bureau of Economic Research, Inc.
  4. Clotfelter, Charles T, 1983. "Tax-Induced Distortions and the Business-Pleasure Borderline: The Case of Travel and Entertainment," American Economic Review, American Economic Association, vol. 73(5), pages 1053-65, December.
  5. De Borger, Bruno & Wuyts, Bart, 2011. "The tax treatment of company cars, commuting and optimal congestion taxes," Transportation Research Part B: Methodological, Elsevier, vol. 45(10), pages 1527-1544.
  6. Clark, Andrew E. & Kristensen, Nicolai & Westergård-Nielsen, Niels C., 2007. "Job Satisfaction and Co-worker Wages: Status or Signal?," IZA Discussion Papers 3073, Institute for the Study of Labor (IZA).
  7. Royalty, Anne Beeson, 2000. "Tax preferences for fringe benefits and workers' eligibility for employer health insurance," Journal of Public Economics, Elsevier, vol. 75(2), pages 209-227, February.
  8. Jos van Ommeren & Arno van der Vlist & Peter Nijkamp, 2002. "Transport-Related Fringe Benefits," Tinbergen Institute Discussion Papers 02-063/3, Tinbergen Institute.
  9. Jos van Ommeren & Arno van der Vlist & Peter Nijkamp, 2006. "Transport-Related Fringe Benefits: Implications For Moving And The Journey To Work," Journal of Regional Science, Wiley Blackwell, vol. 46(3), pages 493-506.
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