Compensation systems and earnings inequality

Lily Jiang () and Hsi-Cheng Yu

The Journal of Economic Inequality, 2014, vol. 12, issue 1, 99-116

Abstract: We develop a wage-structure determination model in which a firm with incomplete information offers an optimal sequence of contracts for its heterogeneous employees. The model integrating the principal-agent framework and monitoring mechanism is characterized by endogeneity of the selection of two compensation methods: performance-pay and non-performance-pay schemes. The model is used to examine the switching of pay schemes and its inequality effect. We point out that the growth of performance-pay jobs is accompanied by a downward adjustment of the rewards for performance, which brings forth a countervailing effect on wage inequality. The simulation analysis of a case of uniform-distributed ability reveals that the net effect of the growth of performance-pay jobs on wage inequality depends on the driving force behind the switch. Copyright Springer Science+Business Media New York 2014

Keywords: Performance pay; Principal-agent theory; Earnings inequality; D63; D82; J31; J33 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s10888-012-9239-y

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