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The pond dilemma with heterogeneous relative concerns

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  • Gola, Paweł

Abstract

This paper explores team formation when workers differ in skills and their desire to out-earn co-workers. I cast this question as a two-dimensional assignment problem, characterise the equilibrium sorting and payoffs for three large classes of specifications, and find that heterogeneity in status preferences drastically changes the distributional and organisational consequences of skill-biased technological change (SBTC). Strikingly, the benefits of SBTC trickle down to low-skill workers with weak relative concerns even when there are no complementarities in production. Moreover, SBTC incentivises domestic outsourcing, as firms seek to avoid detrimental social comparisons between high- and low-skill workers, which provides a compelling explanation for the observed long-term increase in domestic outsourcing.

Suggested Citation

  • Gola, Paweł, 2025. "The pond dilemma with heterogeneous relative concerns," Journal of Public Economics, Elsevier, vol. 249(C).
    • Handle: RePEc:eee:pubeco:v:249:y:2025:i:c:s0047272725001732
    DOI: 10.1016/j.jpubeco.2025.105475
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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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