Performance pay, trade and inequality

Germán Pupato

Journal of Economic Theory, 2017, vol. 172, issue C, 478-504

Abstract: This paper introduces moral hazard into a general equilibrium model with heterogeneous firms to study wage inequality between homogeneous workers. Optimal performance pay contracts yield non-degenerate wage distributions among co-workers, enabling the analysis of two conceptually distinct and empirically relevant dimensions of wage dispersion: between-firm and within-firm inequality. The latter remains virtually unexplored in the literature. As an application, I characterize analytically the impact of trade liberalization on within-firm inequality, highlighting a new channel through which international trade can contribute to residual wage dispersion. To motivate the theory, I show that the model is consistent with cross-firm empirical patterns in residual wage dispersion and performance pay using nationally representative, matched employer–employee data from Canada.

Keywords: Performance pay; Within-firm wage inequality; Moral hazard; Firm heterogeneity; Trade liberalization (search for similar items in EconPapers)
JEL-codes: F16 J31 J33 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:172:y:2017:i:c:p:478-504

DOI: 10.1016/j.jet.2017.10.001

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