Pay Inequity and Peer Dynamics: New Field Evidence on Labor Market Sorting

Performance pay raises productivity but can also trigger costly peer dynamics, which can influence workers’ preferences over pay schemes. We test whether sabotage risk drives compensation choices using a field experiment with Indian vegetable packers. Workers first perform under exogenously assigned tournaments that differ only in pay inequality but are equivalent in total payout, then choose between them, enabling endogenous sorting. Under impartial expert evaluation, workers select steeper tournaments, indicating no aversion to inequality or competition. Under peer evaluation, sabotage escalates sharply with pay dispersion, prompting workers to preemptively prefer more equitable schemes. Our study expands the literature on labor market sorting by identifying sabotage risk as a fundamental driver of sorting and shows how destructive peer dynamics can rationalize compressed wage structures in practice.