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Does Pay Inequality Affect Worker Effort? Experimental Evidence

  • Gary Charness
  • Peter Kuhn

We study worker behavior in an efficiency-wage environment in which coworkers’ wages can influence a worker’s effort. Theoretically, we show that an increase in workers’ responsiveness to coworkers’ wages should lead profit-maximizing firms to compress wages. Our laboratory experiments, by contrast, show that while workers’ effort choices are highly sensitive to their own wages, effort is not affected by coworkers’ wages. This casts doubt on the notion that workers’ concerns with equity might explain pay policies such as wage compression or wage secrecy.

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File URL: http://dx.doi.org/10.1086/519540
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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 25 (2007)
Issue (Month): ()
Pages: 693-723

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Handle: RePEc:ucp:jlabec:v:25:y:2007:p:693-723
DOI: 10.1086/519540
Contact details of provider: Web page: http://www.journals.uchicago.edu/JOLE/

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  12. Gary Charness & David I. Levine, 2007. "Intention and Stochastic Outcomes: An Experimental study," Economic Journal, Royal Economic Society, vol. 117(522), pages 1051-1072, 07.
  13. Linda Babcock & Xianghong Wang & George Loewenstein, 1996. "Choosing the Wrong Pond: Social Comparisons in Negotiations That Reflect a Self-Serving Bias," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 1-19.
  14. Alexandre Mas, 2006. "Pay, Reference Points, and Police Performance," NBER Working Papers 12202, National Bureau of Economic Research, Inc.
  15. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 437-459.
  16. Guillaume Fréchette & John H. Kagel & Massimo Morelli, 2005. "Behavioral Identification in Coalitional Bargaining: An Experimental Analysis of Demand Bargaining and Alternating Offers," Econometrica, Econometric Society, vol. 73(6), pages 1893-1937, November.
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