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Wage dispersion and team performance: a theoretical model and evidence from baseball

  • Robert Breunig
  • Bronwyn Garrett-Rumba
  • Mathieu Jardin
  • Yvon Rocaboy

We develop a general theoretical model of the effect of wage dispersion on team performance which nests two possibilities: wage inequality may have either negative or positive effects on team performance. A parameter which captures the marginal cost of effort, which we estimate using game-level data from Major League Baseball, determines whether wage dispersion and team performance are negatively or positively related. We find low marginal cost of effort; consequently wage disparity is negatively related to team performance. Results from game and season-level regressions also indicate a negative relationship between inequality and performance. We discuss a variety of interpretations of our results.

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Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 663.

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Date of creation: Mar 2012
Date of revision:
Handle: RePEc:auu:dpaper:663
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  1. Donald Richards & Robert Guell, 1998. "Baseball success and the structure of salaries," Applied Economics Letters, Taylor & Francis Journals, vol. 5(5), pages 291-296.
  2. Scully, Gerald W, 1974. "Pay and Performance in Major League Baseball," American Economic Review, American Economic Association, vol. 64(6), pages 915-30, December.
  3. Levine, David I., 1991. "Cohesiveness, productivity, and wage dispersion," Journal of Economic Behavior & Organization, Elsevier, vol. 15(2), pages 237-255, March.
  4. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
  5. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  6. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
  7. Simmons, Rob & Berri, David J., 2011. "Mixing the princes and the paupers: Pay and performance in the National Basketball Association," Labour Economics, Elsevier, vol. 18(3), pages 381-388, June.
  8. Jane, Wen-Jhan, 2010. "Raising salary or redistributing it: A panel analysis of Major League Baseball," Economics Letters, Elsevier, vol. 107(2), pages 297-299, May.
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