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Managing Social Comparison Costs in Organizations

Oscar Contreras and Giorgio Zanarone

No 2018-25, Working Papers from Banco de México

Abstract: This paper studies how organizations manage the social comparisons that arise when their employees' pay and tasks, and hence their status vis-à-vis peers, differ. We show that under a "pay transparency policy", the organization may compress pay and distort the employees' tasks to minimize social comparison costs. We subsequently show that if the organization can credibly commit to informal agreements, it may remove social comparisons by implementing a "pay secrecy" policy. Under such a policy, the organization makes employees "officially equal" by granting them similar formal terms, while optimally differentiating their pay through self-enforcing informal adjustments.

Keywords: Social Comparisons; Organization Design; Informal Contracts; Formal Contracts (search for similar items in EconPapers)
JEL-codes: D03 D23 M52 M54 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-cta and nep-hrm
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