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Pay Inequality, Pay Secrecy, and Effort: Theory and Evidence

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Author Info
Gary Charness
Peter Kuhn

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Abstract

We study worker and firm behavior in an efficiency-wage environment where co-workers' wages may potentially influence a worker's effort. Theoretically, we show that an increase in workers' responsiveness to co-workers' wages should lead profit-maximizing firms to compress wages under quite general conditions. Our laboratory experiments, on the other hand, show that --while workers' effort choices are highly sensitive to their own wages-- effort is not affected by co-workers' wages. As a consequence, even though firms in our experiment tended to compress wages when wages became public information, this did not raise their profits. Our experimental evidence therefore provides little support for the notion that inter-worker equity concerns can make wage compression, or wage secrecy, a profit-maximizing policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11786.

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Date of creation: Nov 2005
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Handle: RePEc:nbr:nberwo:11786

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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  2. John Kagel & Katherine Wolfe, 2001. "Tests of Fairness Models Based on Equity Considerations in a Three-Person Ultimatum Game," Experimental Economics, Springer, vol. 4(3), pages 203-219, December. [Downloadable!] (restricted)
  3. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series 1042, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  4. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May. [Downloadable!] (restricted)
  5. Danziger, Leif & Katz, Eliakim, 1997. "Wage Secrecy as a Social Convention," Economic Inquiry, Oxford University Press, vol. 35(1), pages 59-69, January.
  6. Ernst Fehr & Armin Falk, 2003. "Wage Rigidity in a Competitive Incomplete Contract Market," Labor and Demography 0305001, EconWPA. [Downloadable!]
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  7. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May. [Downloadable!] (restricted)
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  9. Guillaume R. Frechette & John H. Kagel & Steven Lehrer, 2000. "Bargaining in Legislatures: An Experimental Investigation of Open versus Closed Amendment Rules," Econometric Society World Congress 2000 Contributed Papers 1515, Econometric Society. [Downloadable!]
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  12. Frank, Robert H, 1984. "Are Workers Paid Their Marginal Products?," American Economic Review, American Economic Association, vol. 74(4), pages 549-71, September. [Downloadable!] (restricted)
  13. Bolton, Gary E, 1991. "A Comparative Model of Bargaining: Theory and Evidence," American Economic Review, American Economic Association, vol. 81(5), pages 1096-136, December. [Downloadable!] (restricted)
  14. Babcock, Linda & Wang, Xianghong & Lowenstein, George, 1996. "Choosing the Wrong Pond: Social Comparisons in Negotiations That Reflect a Self-Serving Bias," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 1-19, February. [Downloadable!] (restricted)
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  16. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June. [Downloadable!] (restricted)
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(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.)

  1. Johannes Abeler & Steffen Altmann & Sebastian Kube & Matthias Wibral, 2006. "Reciprocity and Payment Schemes: When Equality Is Unfair," IZA Discussion Papers 2500, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Harley Frazis & Mark A Loewenstein, 2006. "Wage Compression and the Division of Returns to Productivity Growth: Evidence from EOPP," Working Papers 398, U.S. Bureau of Labor Statistics. [Downloadable!]
  3. Andrew E. Clark & Orsolya Lelkes, 2009. "Let us pray: religious interactions in life satisfaction," PSE Working Papers 2009-01, PSE (Ecole normale supérieure). [Downloadable!]
  4. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2009. "Social Incentives in the Workplace," IZA Discussion Papers 4190, Institute for the Study of Labor (IZA). [Downloadable!]
  5. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2009. "Social Connections and Incentives in the Workplace: Evidence from Personnel Data," CEPR Discussion Papers 7114, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. 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!]
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  7. Roger Guesnerie & Pedro Jara-Moroni, 2009. "Expectational coordination in simple economic contexts: concepts and analysis with emphasis on strategic substitutabilities," PSE Working Papers 2009-27, PSE (Ecole normale supérieure). [Downloadable!]
  8. 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!]
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