Incentives and peer effects in the workplace: On the impact of envy and wage transparency on organizational design

Jenny Kragl (), Benjamin Bental () and Peymaneh Safaynikoo ()
Additional contact information
Jenny Kragl: EBS Universität für Wirtschaft und Recht, EBS Business School
Benjamin Bental: University of Haifa
Peymaneh Safaynikoo: EBS Universität für Wirtschaft und Recht, EBS Business School

Economic Theory, 2025, vol. 80, issue 1, No 3, 87-124

Abstract: Abstract The article is concerned with understanding the impact of social preferences and wage transparency on the optimal organizational design of firms. We consider a moral-hazard environment with envious workers. The integration of workers in one organizational unit yields productive complementarities but also triggers income comparisons and envy. Separating workers rules out social comparison but also precludes productive synergies. Instead, the firm may impose a wage-secrecy policy to keep the latter while avoiding the former. We show that productive synergies and envy are substitutes under unlimited liability when wages are transparent while they become complements when workers earn rents. As a result, firms are much more likely to integrate workers when the latter are protected by limited liability. Furthermore, even when firms can impose wage secrecy, they prefer not to as long as workers are not too envious. In both cases, firms exploit the incentive effect of pay inequality to raise productive efforts and profits. For the same reason, firms may deliberately establish pay inequality by opting for individual performance pay rather than group bonuses. In this sense, transparency and “sunshine laws” may not be in the self-interest of employees, even more so under a positive minimum wage.

Keywords: Other-regarding preferences; Incentives; Organizational design; Integration; Separation; Inequality; Transparency; Wage secrecy; Envy; Team; Synergy; D63; D82; M52; M54 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00199-024-01622-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:80:y:2025:i:1:d:10.1007_s00199-024-01622-4

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-024-01622-4

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().