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A theory of intra-firm group design

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  • Semih Tumen

    () (Central Bank of the Republic of Turkey)

Abstract

Abstract I develop an intra-firm theory of group design and teamwork in the presence of peer effects. The purpose is to understand the interlinkages between intra-firm group formation and the extent of wage dispersion within the firm. Given a set of heterogeneous workers, the manager faces the challenge of allocating workers into endogenous groups (or teams) to maximize total profits. The optimal allocation features locational proximity between workers with similar productivity levels. I discuss the implications of this allocation on intra-firm wage outcomes. The main idea is that the wage paid to a single worker is determined by the productivity levels of the teammates as well as the worker’s own productivity. This means that team composition is critical to understanding the within-firm productivity and wage differentials. I show that intra-firm wage dispersion is more pronounced when workers are more alike within each team and more different across the teams. I provide numerical exercises designed to illustrate how the model’s predictions change as the key parameters are varied. One striking result is that a rise in the correlation between education and productivity (this can be interpreted as hiring workers with vocational education) leads to a decline in wage inequality within the firm. I also show that changes in the dispersion of worker efficiency lead to non-monotonic effects on within-firm wage inequality.

Suggested Citation

  • Semih Tumen, 2016. "A theory of intra-firm group design," Journal of Productivity Analysis, Springer, vol. 45(1), pages 89-102, February.
  • Handle: RePEc:kap:jproda:v:45:y:2016:i:1:d:10.1007_s11123-015-0452-0
    DOI: 10.1007/s11123-015-0452-0
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    Cited by:

    1. Semih Tumen & Tugba Zeydanli, 2016. "Social interactions in job satisfaction," International Journal of Manpower, Emerald Group Publishing, vol. 37(3), pages 426-455, June.

    More about this item

    Keywords

    Group design; Peer effects in the workplace; Within-firm pay differences; Sorting; Selectivity;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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