A Case for Pay Secrecy

Tomer Blumkin, David Lagziel and Yoram Margalioth

American Law and Economics Review, 2023, vol. 25, issue 1, 268-299

Abstract: In this paper, we study a labor market setup in which workers exhibit relative remuneration concerns with respect to their peers. We first characterize the optimal labor contract offered by the firm and provide necessary and sufficient conditions for the desirability of incorporating pay-secrecy clauses in such a contract. We then demonstrate that, in contrast to conventional wisdom viewing wage-secrecy arrangements as detrimental for workers, the latter may, in fact, gain from the lack of pay transparency.

Date: 2023
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