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Pay Inequality, Pay Secrecy, and Effort: Theory and Evidence

Gary Charness () and Peter Kuhn ()

No 11786, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study worker and firm behavior in an efficiency-wage environment where co-workers' wages may potentially influence a worker's effort. Theoretically, we show that an increase in workers' responsiveness to co-workers' wages should lead profit-maximizing firms to compress wages under quite general conditions. Our laboratory experiments, on the other hand, show that --while workers' effort choices are highly sensitive to their own wages-- effort is not affected by co-workers' wages. As a consequence, even though firms in our experiment tended to compress wages when wages became public information, this did not raise their profits. Our experimental evidence therefore provides little support for the notion that inter-worker equity concerns can make wage compression, or wage secrecy, a profit-maximizing policy.

JEL-codes: C91 J41 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
Date: 2005-11
Note: LS
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Published as Gary Charness & Peter Kuhn, 2007. "Does Pay Inequality Affect Worker Effort? Experimental Evidence," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 693-723.

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