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Managing Social Comparison Costs in Organizations

Author

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  • Oscar F. Contreras
  • Giorgio Zanarone

Abstract

This paper studies how organizations manage the social comparisons that arise when their employees' pay and tasks, and hence their status vis-à-vis peers, differ. We show that under a "pay transparency policy", the organization may compress pay and distort the employees' tasks to minimize social comparison costs. We subsequently show that if the organization can credibly commit to informal agreements, it may remove social comparisons by implementing a "pay secrecy" policy. Under such a policy, the organization makes employees "officially equal" by granting them similar formal terms, while optimally differentiating their pay through self-enforcing informal adjustments.

Suggested Citation

  • Oscar F. Contreras & Giorgio Zanarone, 2018. "Managing Social Comparison Costs in Organizations," Working Papers 2018-25, Banco de México.
  • Handle: RePEc:bdm:wpaper:2018-25
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    References listed on IDEAS

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    Cited by:

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    3. Matthias Fahn & Anne Schade & Katharina Schüßler, 2017. "What Drives Reciprocal Behavior? The Optimal Provision of Incentives over the Course of Careers," CESifo Working Paper Series 6635, CESifo.

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    More about this item

    Keywords

    Social Comparisons; Organization Design; Informal Contracts; Formal Contracts;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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