Do Co-Workers’ Wages Matter? Theory and Evidence on Wage Secrecy, Wage Compression and Effort

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Do Co-Workers’ Wages Matter? Theory and Evidence on Wage Secrecy, Wage Compression and Effort

Author Info

Charness, Gary (University of California, Santa Barbara)
Kuhn, Peter () (University of California, Santa Barbara and IZA Bonn)

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Abstract

We study worker and firm behavior in an environment where worker effort could depend on co-workers’ wages. Theoretically, we show that an increase in workers’ ‘concerns’ with coworkers’ wages should lead profit-maximizing firms to compress wages under quite general conditions. However, firms should be harmed by such concerns, and such concerns can justify paying equal wages to workers of unequal productivity only when those concerns are asymmetric (in the sense that only underpayment matters). Our laboratory experiments indicate that workers’ effort choices are highly sensitive to their own wages, but largely unresponsive to co-workers’ wages. Despite this, in apparent anticipation of a negative worker reaction, firms in our experiment were more likely to compress wages when wages became public information. Profits were not significantly reduced by a requirement to make wages public. Overall, our results seem to weaken the case that either wage secrecy or wage compression is a profit-maximizing policy in practice.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1417.

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Length: 47 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1417

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Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-12-12 (All new papers)
NEP-EXP-2004-12-12 (Experimental Economics)

References listed on IDEAS
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Other versions:
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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Heike Hennig-Schmidt & Bettina Rockenbach & Abdolkarim Sadrieh, 2005. "In Search of Workers' Real Effort Reciprocity - A Field and a Laboratory Experiment," Discussion Papers 55, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
Other versions:
- Heike Hennig-Schmidt & Bettina Rockenbach & Abdolkarim Sadrieh, 2005. "In Search of Worker’s Real Effort Reciprocity – A Field and a Laboratory Experiment," Artefactual Field Experiments 0056, The Field Experiments Website. [Downloadable!]
- Heike Hennig-Schmidt & Bettina Rockenbach & Abdolkarim Sadrieh, 2008. "In Search of Workers' Real Effort Reciprocity - A Field and a Laboratory Experiment," Discussion Papers 238, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2006. "Gift Exchange and the Separation of Ownership and Control," Tinbergen Institute Discussion Papers 06-037/1, Tinbergen Institute. [Downloadable!]
Andrew E. Clark & David Masclet & Marie-Claire Villeval, 2006. "Effort and Comparison Income: Experimental and Survey Evidence," IZA Discussion Papers 2169, Institute for the Study of Labor (IZA). [Downloadable!]
Other versions:
- Andrew E. Clark & David Masclet & Marie-Claire Villeval, 2008. "Effort and Comparison Income: Experimental and Survey Evidence," CEP Discussion Papers dp0886, Centre for Economic Performance, LSE. [Downloadable!]
Wu, Steven & Roe, Brian & Sporleder, Thomas, 2006. "Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study," MPRA Paper 21, University Library of Munich, Germany. [Downloadable!]
Other versions:
- Wu, Steven Y. & Roe, Brian & Sporleder, Thomas, 2007. "Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9703, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
Andrew E. Clark & David Masclet & Marie-Claire Villeval, 2006. "Effort and comparison income: Survey and experimental evidence," PSE Working Papers 2006-03, PSE (Ecole normale supérieure). [Downloadable!]
Other versions:
- Andrew Clark & Davis Masclet & Marie-Claire Villeval, 2006. "Effort and Comparison Income : Survey and Experimental Evidence," Working Papers 0601, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
- Andrew Clark & David Masclet & Marie-Claire Villeval, 2006. "Effort and Comparison Income : Survey and Experimental Evidence," Post-Print halshs-00142880_v1, HAL. [Downloadable!]
Ana Rute Cardoso, 2005. "Big Fish in Small Pond or Small Fish in Big Pond? An Analysis of Job Mobility," IZA Discussion Papers 1900, Institute for the Study of Labor (IZA). [Downloadable!]
Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2004. "Gift Exchange in a Multi-worker Firm," Tinbergen Institute Discussion Papers 04-100/1, Tinbergen Institute. [Downloadable!]
Other versions:
- Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2007. "Gift Exchange in a Multi-Worker Firm," Economic Journal, Royal Economic Society, vol. 117(522), pages 1025-1050, 07. [Downloadable!] (restricted)

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