Research

In many countries, collective agreements tend to equalize wages across workers in the same sector and job. We analyze the impact of imposing wage equality on incentive contracts and firms' hiring policies. In our setting, an employer considers hiring two envious workers who differ only in their productivities. The employer offers the workers incentive contracts with identical fixed wages and potentially individualized bonuses. In this environment, we highlight the interaction between worker characteristics, optimal incentive contracts, and the employer's hiring policy. We find that, when the collective wage does not constrain the employer, fixed-wage equality implies bonus equality. Moreover, once the workers' sensitivity to disadvantageous inequality becomes sufficiently high, the optimal contract deters the low-productivity worker from accepting it, even if productivity differences between the workers are small. Finally, where the agreed-upon fixed wage binds the employer, bonus pay is tailored to the workers' productivity. In that case, the presence of social preferences allows the employer to exploit the intrinsic incentives arising from the workers' relative-income concerns. Furthermore, in this scenario, it is more likely that both workers will be hired. 

Working paper

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. 

Working paper

Prior economic research is oftentimes critical about family managers. Nepotism, altruism, lower managerial abilities, and a small pool of qualified family candidates are cited as reasons that speak against family management. However, empirical data shows that a large share of firms is run by family managers. Our study provides a rational economic explanation for this paradox, linked to the multitasking problem in family firms, whereby managerial tasks are related to the economic and non-economic goals of the business-owning family. Comparing the performance of family and non-family managers under moral hazard and imperfect performance measurement, we find that incentive pay leads to an effort distortion towards economic outcomes for both manager types. This effort misallocation is more pronounced when economic and non-economic management tasks are weak complements or even substitutes. While incentive pay is more effective for non-family managers, family managers are generally more reluctant to neglect non-economic goals. We show that this, together with the family managers' particular expertise regarding non-economic goals of the family business, can overtrump poor skills in economic tasks and even outweigh lower total abilities on average. This highlights why, in fact, family managers are often the optimal appointment choice, which becomes even more relevant in light of the increasing importance of non-economic sustainability goals. Notably, the interdependence between economic and non-economic goals of the owner family in the manager's job tends to have a moderating effect on the family manager's relative performance. We moreover verify that a family manager is more likely to outperform a non-family manager the more aligned the performance measure with the family's goals and the less severe the moral-hazard conflict with the family. Our study contributes to the literature about family management and agency costs in family firms and has practical implications for family businesses deciding between hiring managers from in or outside the family. By highlighting the importance of non-economic goals it moreover adds to the current discussion about the implementation of and the compliance with businesses' sustainability goals.

Working paper 

The article is concerned with understanding the impact of social preferences and wealth inequality on aggregate economic outcomes. We investigate how different manifestations of societal other-regarding preferences affect labor relationships and incentive contracts at the microeconomic level and how these in turn translate into macroeconomic outcomes. Increasing the workers' sensitivity to inequality raises effort and reduces wage costs for poor but not necessarily for rich workers. A parameterized version of the model roughly mimicking relevant key features of the industrialized world shows that, at the general equilibrium, increased initial wealth differences raise aggregate profit and output but entail distributional utility losses and increased inequality. 

Working paper

We show that under multitasking - where tasks can be substitutes or complements - a specialist worker with an uneven skill distribution can outperform a generalist with higher average skills. We use a principal-agent model to study worker efficiency and welfare. The main result is robust if a rent-efficiency trade-off is added. 

Working paper

This paper shows that relative pay comparisons among coworkers may induce employers to implement discretionary bonus pay rather than tournaments even if worker performance is nonverifiable. In a repeated game between the firm and its workers, I explore the trade-off between the agency costs due to the firm's commitment problem and those due to envy among workers. When workers are purely selfish, the tournament outperforms independent bonus contracts, while the result is reversed for envious workers if the firm's commitment ability is sufficiently high. Moreover, bonus contracts may become superior more often as envy among workers gets more pronounced. 

I compare group to individual performance pay when workers are envious and performance is nonverifiable. Avoiding payoff inequity, the group reward scheme is optimal as long as the firm faces no credibility problem. The individual reward scheme may, however, become superior albeit introducing the prospect of unequal pay. This is due to two reasons: Group incentives are relatively low-powered compared to individual incentives, requiring higher incentive pay and impeding credibility of the firm. Moreover, with individual rewards, the firm benefits from the incentive-strengthening effect of envy, allowing for yet smaller overall incentive pay and further softening the credibility constraint. I also show that contracts combining both individual and group rewards are often optimal, depending on the firm's credibility problem. These contracts include joint and relative performance pay schemes.

Working paper

We analyze the effects of wage floors on optimal job design in a moral-hazard model with asymmetric tasks and imperfect aggregate performance measurement. Due to cost advantages of specialization, assigning the tasks to different agents is efficient. A sufficiently high wage floor, however, induces the principal to dismiss one agent or to even exclude tasks from the production process. Imperfect performance measurement always lowers profit under multitasking, but may increase profit under specialization. We further show that variations in the wage floor and the agents' reservation utility have significantly different effects on welfare and optimal job design. 

Working paper

We study the effects of envy on relational employment contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which reflects an agent’s individual contribution to firm value. Both agents exhibit horizontal disadvantageous inequity aversion. In contrast to the literature, we find that inequity aversion may be beneficial; in the presence of envy, for a certain range of interest rates, relational contracts may be more profitable. For some interest rates reputational equilibria exist only with envious agents.

Working paper

In this study, we consider the role of punishment as a way to promote and sustain cooperation in social dilemmas. Cooperation among strangers is essential for societies to thrive. Yet, cooperation often breaks down, especially in one-shot interactions among strangers. Although punishment of free-riders can alleviate such problems, some studies suggest that individuals often dislike this type of punishment. We conduct a crowdsourced experiment with more than 7,000 participants divided into 14 treatments to examine what determines the social appropriateness of punishing free riders. Contrary to the traditional view on punishment in economics, we find that there is a disconnect between first-order norms (cooperation) and second-order norms (punishment to promote cooperation). Our study also provides guidelines for institutional design, as we show that a positive punishment norm can exist when sanctions are expressive rather than harmful or when sanctioning is delegated to impartial third parties.

Persistent gender gaps in self-promotion contribute to unequal labor market outcomes. In this study, we investigate how AI-assisted writing tools  shape self-promotion, and, as a secondary outcome, confidence and how these effects interact with gender. For this purpose, we conducted an online experiment in China in which participants wrote self-promotion texts, provided a numerical self-promotion score and stated their confidence about how they will perform in an upcoming math and logic test. We find suggestive evidence that AI assistance reduces numerical self-evaluations. Neither gender nor the interaction between gender and AI assistance is significantly related to self-promotion or confidence. We conduct a text analysis to investigate the mechanisms behind these results.