IDEAS home Printed from https://ideas.repec.org/p/ant/wpaper/2010016.html
   My bibliography  Save this paper

Subsidizing consumption to signal quality of workers

Author

Listed:
  • DE BORGER, Bruno
  • GLAZER, Amihai

Abstract

A firm whose profits increase when outsiders believe that it pays high wages may induce its workers to over-consume goods that signal high compensation. One implication is that firms may lobby for government subsidies when they offer fringe benefits with high signaling value, such as company cars, to their employees. We show that under plausible conditions the provision of fringe benefits indeed can signal the firm's type. Moreover, we demonstrate the existence of multiple equilibria---one equilibrium has no firm providing certain fringe benefits, whereas another equilibrium has fringe signal the firm's type. The paper further shows that a firm that provides the fringe benefit may oppose a government subsidizing it too heavily, because a large subsidy could destroy the signaling value of the benefit. The analysis shows that an employer may even provide a fringe benefit to employees who place no value on it. Our results are consistent with many stylized facts on the provision of fringe benefits by firms.

Suggested Citation

  • DE BORGER, Bruno & GLAZER, Amihai, 2010. "Subsidizing consumption to signal quality of workers," Working Papers 2010016, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2010016
    as

    Download full text from publisher

    File URL: https://repository.uantwerpen.be/docman/irua/f68f52/4c21bd65.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
    2. Oyer, Paul, 2004. "Salary or Benefits?," Santa Cruz Department of Economics, Working Paper Series qt8xs3k3j8, Department of Economics, UC Santa Cruz.
    3. Long, James E & Scott, Frank A, 1982. "The Income Tax and Nonwage Compensation," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 211-219, May.
    4. Clotfelter, Charles T, 1983. "Tax-Induced Distortions and the Business-Pleasure Borderline: The Case of Travel and Entertainment," American Economic Review, American Economic Association, vol. 73(5), pages 1053-1065, December.
    5. Eva Gutiérrez-i-Puigarnau & Jos van Ommeren, 2007. "Welfare Effects of Distortionary Company Car Taxation," Tinbergen Institute Discussion Papers 07-060/3, Tinbergen Institute, revised 20 Mar 2009.
    6. De Borger, Bruno & Wuyts, Bart, 2011. "The tax treatment of company cars, commuting and optimal congestion taxes," Transportation Research Part B: Methodological, Elsevier, vol. 45(10), pages 1527-1544.
    7. AndrewE. Clark & Nicolai Kristensen & Niels Westergård-Nielsen, 2009. "Job Satisfaction and Co-worker Wages: Status or Signal?," Economic Journal, Royal Economic Society, vol. 119(536), pages 430-447, March.
    8. Royalty, Anne Beeson, 2000. "Tax preferences for fringe benefits and workers' eligibility for employer health insurance," Journal of Public Economics, Elsevier, vol. 75(2), pages 209-227, February.
    9. Jos van Ommeren & Arno van der Vlist & Peter Nijkamp, 2006. "Transport-Related Fringe Benefits: Implications For Moving And The Journey To Work," Journal of Regional Science, Wiley Blackwell, vol. 46(3), pages 493-506.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. De Borger, Bruno & Wuyts, Bart, 2011. "The tax treatment of company cars, commuting and optimal congestion taxes," Transportation Research Part B: Methodological, Elsevier, vol. 45(10), pages 1527-1544.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ant:wpaper:2010016. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joeri Nys). General contact details of provider: http://edirc.repec.org/data/ftufsbe.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.