Core Readings

Brown, Martin, Armin Falk and Ernst Fehr (2004), “Relational Contracts and the Nature of Market Interactions”, Econometrica 72(3): 747-780.

This lab experiment shows how stable, long-term employment relationships with high agent effort can emerge endogenously from repeated interactions when effort is not contractible.  

Falk, Armin, and Michael Kosfeld, (2006). "The hidden costs of control," American Economic Review, 96(5): 1611-1630.

Analyzes the consequences of control on motivation in an experimental principal- agent game. Results show that control entails hidden costs since most agents reduce their performance as a response to the principal’s controlling decision. 

Fehr, Ernst, Alexander Klein, and Klaus M. Schmidt, (2007). "Fairness and contract design," Econometrica, 75(1): 121-154.

Shows experimentally that bonus contracts provide powerful incentives and are superior to explicit incentive contracts when there are some fair-minded players, but trust are less efficient than incentive contracts. The principals understand this and predominantly choose the bonus contracts.

Card, David, Alexandre Mas, Enrico Moretti, and Emmanuel Saez, (2012). "Inequality at work: The effect of peer salaries on job satisfaction," American Economic Review, 102(6): 2981-3003. 

Takes advantage of the fact of California’s “right to know” law. Conducts a field experiment on faculty and staff at University of California, and finds that negative comparisons matter more than positive comparisons for a worker’s perceived job satisfaction.

Breza, Emily, Supreet Kaur, and Yogita Shamdasani, (2017). "The morale effects of pay inequality," The Quarterly Journal of Economics, 133(2): 611-663.

Conducts a month-long field experiment with Indian manufacturing workers. Results suggest pay inequality reduces output and ability to cooperate in when coworkers’ productivity is difficult to observe. However, pay disparity has no discernible effect when productivity is easy to observe.

Newer Resources

Sections 10.1-10.6:  Reciprocity, Reference Points and Trust

Kelley, Robert, and Janet Caplan, (1993). “How Bell Labs Creates Star Performers,” Harvard Business Review, 74(4):128-39.

Research at the Bell Laboratories Switching Systems Business Unit (SSBU) has revealed that the real difference between stars and average workers is not IQ but the ways top performers do their jobs:  stars do lots of favors for co-workers, then draw on the network they have created when they need a crucial piece of information.  Norms of reciprocity sustain these exchanges.  

Gurven, Michael D, (2014). “The Tsimane rarely punish: an experimental investigation of dictators, ultimatums and punishment,” Experimenting with Social Norms: Fairness and Punishment in a Cross-Cultural Perspective. J. Ensminger, J. Henrich, Editors. New York: Russell Sage Foundation, pp. 197-223.

Examines the Strategy Method Ultimatum Game (SMUG), Dictator Game (DG), and the Third Party Punishment Game (TPPG) played among the Tsimane of Bolivia.  The Tsimane appear to be much less reciprocal than people living in modern economies.  

DellaVigna, Stefano, John A. List, Ulrike Malmendier and Gautam Rao 2022 “Estimating Social Preferences and Gift Exchange at Work”  American Economic Review, 112(3): 1038–1074

The authors design three field experiments to estimate how workers' social preferences toward their employer motivates their work effort. They vary the pay rates offered to workers, the return to the employer, and employer generosity (demonstrated via unexpected gifts). Workers exert effort even without private incentives, but their effort does not depend on how much their effort helps the employer. This is consistent with a "warm glow" motive for helping the employer but not with pure worker altruism.

Malmendier, Ulrike, and Klaus M. Schmidt, (2017). “You Owe Me,” American Economic Review, 107(2): 493-526.

If receiving a gift imposes an obligation on the receiver, giving a gift can be seen as imposing a cost, or a negative externality on the receiver.   This paper explores these negative externalities in a controlled laboratory experiment, and shows that these externalities have powerful effects even in the absence of monetary incentives. Conducts three policy treatments to evaluate the effectiveness of policy interventions that are often proposed to mitigate the effects of gifts with negative externalities.

Sliwka, Dirk, and Peter Werner, (2014). “Wage Increases and the Dynamics of Reciprocity,” Journal of Labor Economics, 35(2):299-344.

Conducts a real-effort experiment: agents earn the same wage sum in all treatments, but wage increases are distributed differently over time. Findings suggest agents work harder under increasing wage profiles if they do not know these profiles in advance.   This may be because they perceive the wage increases as 'gifts'.  

Beckmann, Michael, Thomas Cornelissen and Matthias Kräkel (2016) Self-managed working time and employee effort: Theory and evidence  Journal of Economic Behavior & Organization 133 (2017) 285–302. 

Allowing workers to choose their own hours (self-managed working time, SMWT), can theoretically increase effort via intrinsic motivation, can also lead to increased shirking.  Using German individual-level panel data, the authors find that SMWT employees exert higher effort levels than employees with fixed working hours, even after accounting for observed and unobserved characteristics. This effect is largely driven by employees who are intrinsically motivated.

Carpenter, Jeffrey P, (2017).  “The Sequencing of Gift Exchange: A Field Trial,” IZA Discussion Papers number 10736.

Reports the results of a field experiment that compares the principal-first and agent-first orderings to each other and a gift-less control. Findings suggest that: consistent with the literature, principal-first gifts do increase agent performance; unlike the literature, agent-first gifts are also effective; agent-first ordering works best, and is clearly cheaper. 

Davies, Elwyn, and Marcel Fafchamps, (2017). “When No Bad Deed Goes Punished: Relational Contracting in Ghana versus the UK,” NBER working paper number 23123. 

Conducts a repeated gift-exchange experiment framed as an employment contract, with university students in Ghana and the UK. UK subjects behave in line with theoretical predictions and previous experiments: wage offers reward high effort and punish low effort; this induces workers to choose high effort; and gains from trade are shared between workers and employers.  Ghanaian subjects, on the other hand, behave very differently:  employers do not reduce wage offers after low effort; workers often choose low effort; and employers earn zero payoffs on average. 

de Ree, Joppe, Karthik Muralidharan  and Menno Pradhan, and Halsey Rogers, (2018). “Double for Nothing? Experimental Evidence on an Unconditional Teacher Salary Increase in Indonesia.” The Quarterly Journal of Economics, 122(2):993-1039.

Results from a large-scale randomized experiment across a representative sample of Indonesian schools show that large teacher pay increases led to no improvement in student learning outcomes.  The pay increase did, however, significantly improve teachers' satisfaction with their income, reduced the incidence of teachers holding outside jobs, and reduced teachers' self-reported financial stress.

Bartling Björn, Ernst Fehr, David Huffman, and Nick Netzer, (2018). "The Causal Effect of Trust," IZA Discussion Paper No. 11917.

Experimentally and theoretically shows that trust has a positive, beneficial causal effect on the outcomes of human interactions in strategic settings. The duration of the effect depends, however, on whether initial trust variations are supported by multiple equilibria. 

Bruhin, Adrian, Ernst Fehr, and Daniel Schunk. “The Many Faces of Human Sociality: Uncovering the Distribution and Stability of Social Preferences” Journal of the European Economic Association, Volume 17, Issue 4, August 2019, Pages 1025–1069.   

A detailed experimental study of Swiss university students shows that other-regarding preferences are the rule, not the exception.  Three broad types of individuals are identified, all of whom value others’ payoffs more when they are ahead than when they are behind others. “Strong altruists” are moderately reciprocal and put positive value on others even when behind.  “Moderate altruists” display no reciprocity and place positive, but less weight on others’ payoffs.  “Behindness –averse” types put a large negative weight on others’ payoffs when behind and are selfish otherwise.   The purely selfish model of “rational economic man” does not emerge as a useful model of behavior for any group of subjects. 

Ederer, Florian and Frédéric Schneider, 2019. "The Persistent Power of Promises," Cowles Foundation Discussion Papers 2129R

Using a large-scale hybrid laboratory and online trust experiment this paper investigates how the passage of time affects trust, trustworthiness, and cooperation.  Communication (predominantly through the use of promises) raises cooperation, trust, and trustworthiness by about 50 percent.  This effect is not mitigated by the passage of time. 

Akerlof, Robert, Anik Ashraf, Rocco Macchiavello, and Atonu Rabbani (2020) Layoffs and Productivity at a Bangladeshi Sweater Factory.  CESifo Working Paper No. 8492

A mass layoff in a large Bangladeshi sweater factory resulted in a large and persistent reduction in the productivity of surviving workers.  Productivity declines were greatest for worker whose friends had been fired, and appear to involve deliberate shading of performance by workers in order to punish the factory’s management.

Fehr, Ernst, Michael Powell and Tom Wilkening Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms American Economic Review 2021, 111(4): 1055–1091.

Principal-agent contracts that are designed for rational agents (like the ones in Part One of the book) can perform quite poorly when agents exhibit reciprocal behavior.  Specifically, agents react to large penalties for misbehavior (lying, or mis-using arbitration opportunities) by retaliating against the principal, even when the fines are legitimate.  In contrast, contracts that take agents’ ‘behavioral’ propensities into account can perform much better.  

Macchiavello, Rocco and Ameet Morjaria  “Competition and Relational Contracts in the Rwanda Coffee Chain” The Quarterly Journal of Economics, Volume 136, Issue 2, May 2021, Pages 1089–1143

In a study of relationships between Rwandan coffee farmers and the mills that purchase their coffee, the authors find that increased competition among mills reduces the farmers’ profits.  It does this by hampering relational contracts between farmers and mill owners.  These (legally unenforceable) relational contracts include inputs and loans provided by the mill to the farmers before harvest, coffee sold on credit by farmers to the mill during harvest, and assistance from the mill to the farmers that is unrelated to the harvest. When many mills are present, farmers have a greater incentive to default on their relational contract with mill owners, reducing causing markets to function poorly as trust between the parties declines.

Krueger, Miriam and Guido Friebel. 2021. A Pay Change and Its Long-term Consequences. Journal of Labor Economics, forthcoming.

In a professional services firm, top management unexpectedly adjusted the pay scheme of consultants in some divisions by raising fixed wages but reducing bonuses.  This caused a reduction in pay for the more productive workers and an increase for the low performers.  As a result, workers’ outputs and inputs decreased by 30%, and attrition and absenteeism increased, mostly among the workers who were hurt by the pay change. The authors argue that much of the reduction in effort was due to persistent negative reciprocity among the group that was harmed, not a response to declining marginal incentives.

De Chiara, Alessandro, Florian Engl, Holger Herz, and Ester Manna. 2022 Control Aversion in Hierarchies CESifo Working Paper No. 9779, June 2022

The authors use a lab experiment to test whether hierarchical distance of superiors who impose controls on workers affects workers’ reactions to being controlled.  They find that hierarchical proximity magnifies control aversion and discuss several potential channels for this result.

Ederer, Florian and Frédéric Schneider 2022 Trust and Promises over Time  American Economic Journal: Microeconomics 2022, 14(3): 304–320

Using a large-scale experiment, the authors investigate how communication and the passage of time affects trust. Communication (predominantly through promises) raises cooperation, trust, and trustworthiness by about 50 percent. This result holds even after three weeks, suggesting that the passage of this amount of time does not reduce trust or trustworthiness or affect how people communicate.

Fahn, Matthias. 2023 Reciprocity in Dynamic Employment Relationships Management Science, forthcoming.   

This paper analyzes a dynamic relational contract for employees with reciprocal preferences. In the author’s model, generous upfront wages activate the norm of reciprocity and become most important when an employee is close to retirement. In earlier stages, direct financial incentives are more effective. Hence, direct and reciprocity-based incentives reinforce each other.

Fehr, Ernst and Gary Charness 2023. Social Preferences: Fundamental Characteristics and Economic Consequences CESifo Working Paper No. 10488 (June).

The authors review the vast literature on social preferences.  Topics covered include how peoples’ distributional preferences are affected by merit, luck, and risk, and concerns for equality of opportunity. The evidence indicates that a large majority of individuals have some sort of social preference while purely self-interested subjects are a minority. 

Fahn, Matthias , W. Bentley MacLeod, Gerd Muehlheusser 2023 Past and Future Developments in the Economics of Relational Contracts IZA discussion paper no. 16427

This document introduces a book, "Symposium on Relational Contracts", that contains eleven contributions to the economics of relational contracts, written by many of the leading scholars in the field.

Section 10.7: Fairness between Workers

Effects of Co-workers’ Wages on Employee Performance

Abeler, Johannes, Sebastian Kube and Steffen Altmann, and Matthias Wibral, (2010). "Gift Exchange and Workers’ Fairness Concerns: When Equality is Unfair," Journal of the European Economic Association Vol. 8, No. 6 (December), pp. 1299-1324. 

Analyzes how horizontal fairness concerns affect performance and efficiency in an environment characterized by contractual incompleteness. The authors find that the use of equal wages elicits substantially lower efforts.

Cohn, Alain, Ernst Fehr, Benedikt, Herrmann, and Frédéric Schneider, (2014). “Social Comparison and Effort Provision: Evidence from a Field Experiment,” Journal of the European Economic Association, 12(4):877-898.

Conducts a field experiment to study workers’ effort responses if their own wage or that of a co-worker is cut. Cutting both group members’ wages caused a decrease in performance. But when only one group member’s wage was cut, the affected workers decreased their performance more than twice as much as when both workers’ wages were cut. 

Charness, Gary., Till Gross, and Christopher Guo, (2014). “Merit Pay and Wage Compression with Productivity Differences and Uncertainty,” Journal of Economic Behavior & Organization, 117:233-247. 

Experimentally investigates wage setting and effort choices in a multi-worker setting when there is heterogeneity in worker productivity and managers’ perception of this productivity is imperfect. Findings suggest that: higher-ability workers will reduce their effort if not paid more than coworkers with lower ability; the higher the uncertainty about employee ability levels, the more managers compress wages between perceived high- and low-ability workers. 

Bracha, Anat, Uri Gneezy, and George Loewenstein (2015). “Relative Pay and Labor Supply,” Journal of Labor Economics, 33(2):297-315.

In a lab experiment, the authors test the hypothesis that, ceteris paribus, making a given wage high (low) relative to other wage levels will lead to an increase (decrease) in labor supply. They find that labor supply does respond significantly to relative pay, however, when a strong enough reason for the relative low pay is given, this difference disappears.

Cohen, Patricia, (2015). “A Company Copes With Backlash Against the Raise That Roared," New York Times, July 31. 

Dan Price, chief of Gravity Payments, raised the annual salary floor for his employees to $70,000. Most responses were positive, but Mr. Price says that even the negative letters were valuable.

Armin, Falk., Fabian Kosse, Ingo Menrath, Pablo Emilio Verde, and Johannes Siegrist, (2016). “Unfair Pay and Health,” SOEP paper number 870.

Investigates physiological responses to perceptions of unfair pay using an integrated approach exploiting complementarities between controlled lab and representative panel data. The findings establish a link between unfair payment and heart rate variability. 

Cullen, Zoe B. and Bobak Pakzad-Hurson, (2017). “Equilibrium Effects of Pay Transparency,” Harvard Business School.

Combining a dynamic wage-bargaining model with data from online markets for low-skill, temporary jobs that differ in their level of transparency, the authors find that wages are more equal, but lower under transparency. Transparency increases hiring and employer profits, rising 28% in an online field experiment. 

Mas, Alexandre, (2017). “Does Transparency Lead to Pay Compression?” Journal of Political Economy, 125(5): 1683-1721.  

Examines a 2010 California mandate that required municipal salaries to be posted online to study whether pay disclosure in the public sector changes wage setting.  Among top managers, disclosure led to decline in average compensation and increase in their quit rate. 

Widdicombe, Lizzie, (2018). “Improving workplace culture, one review at a time,” The New Yorker. January 15.

With its emphasis on transparency, the jobs site Glassdoor aims to upend corporate power dynamics.

Cullen, Zoe and Ricardo Perez-Truglia (2021). “How Much Does Your Boss Make? The Effects of Salary Comparisons,” Journal of Political Economy, forthcoming (earlier version available as NBER Working Paper No. 24841.

Studies how employees learn about the salaries of their peers and managers and how their beliefs about those salaries affect their own behavior by conducting a field experiment with a sample of 2,060 employees from a multi-billion dollar corporation. Finds that perceived peer and manager salaries have a significant causal effect on employee behavior.

Baker, Michael,  Yosh Halberstam, Kory Kroft, Alexandre Mas, and Derek Messacar.  2020 "Pay Transparency and the Gender Gap".  American Economic Journal: Applied Economics 2023, 15(2): 157–183. 

The authors study the effects of public sector salary disclosure laws on university faculty salaries in Canada.  They find robust evidence that that the laws reduced the gender pay gap between men and women by approximately 30 percent. 

Christie, Brett (2018). “Communication Key for Employees’ Perceptions of Pay Fairness,” Workspan Daily, August 27. 

Pay Equity Advice from a leading HRM organization.  

Almås, Ingvild & Cappelen, Alexander & Tungodden, Bertil. (2020). “Cutthroat Capitalism versus Cuddly Socialism: Are Americans More Meritocratic and Efficiency-Seeking than Scandinavians?”  Journal of Political Economy, Volume 128, Number 5. 

Spectators in the US and Norway had the opportunity to redistribute pay from high- to low-paid workers (on MTurk) when (a) the pay gap was randomly assigned, versus (b) the pay gap was due to a productivity difference.  When the pay gap was due to luck, 80% of Norwegians chose to completely eliminate it; only 50% of Americans did this.  When the pay gap was due to performance, 35% of Norwegians still chose to redistribute completely; only 10% of Americans did this.  Thus,  national culture seems to affect peoples’ perceptions of fairness in compensation:  Americans are much less egalitarian, and much less averse to rewarding luck than Norwegians. 

In a project called “Fairness Across the World” The authors are extending this study to 60 countries, with 65,000 spectator workers.

Dube, Arindrajit, Laura Giuliano, and Jonathan Leonard.  Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior  American Economic Review, 2019, 109 (2), 620.

Analyzes how separations responded to arbitrary differences in own and peer wages at a large U.S. retailer.  Regression-discontinuity estimates imply large causal effects of peer wages on separations, mostly driven by comparisons with higher-paid peers.   

Cullen, Zoe and Ricardo Perez-Truglia, (2018). “The Salary Taboo: Privacy Norms and the Diffusion of Information,” NBER working Paper No. 25145.

Conducts a field experiment with 752 employees at a multibillion-dollar firm. Provides evidence of significant frictions in how employees search for and share salary information and suggestive evidence that these frictions are due to privacy norms. No evidence suggests any significant differences in information frictions between female and male employees.

Perez-Truglia, Ricardo (2020)  The Effects of Income Transparency on Well-Being: Evidence from a Natural Experiment American Economic Review 110(4): 1019–1054.

In 2001, Norwegian tax records became easily accessible online, allowing everyone in the country to observe the incomes of everyone else.  According to the income comparisons model, this change in transparency can widen the gap in well-being between richer and poorer individuals. Using survey data from 1985–2013 and multiple identification strategies, we show that the higher transparency increased the gap in happiness between richer and poorer individuals by 29 percent, and it increased the life satisfaction gap by 21 percent.  

Ritter, Beth M. and Jim Fickess. 2020 Downstream Implications of Pay Transparency: A Study of Studies Journal of Total Rewards.

A recent employer survey indicates only limited employer adoption of pay transparency, but some interest in moving towards greater transparency.

Hjort, Jonas, Xuan Li and Heather Sarsons.  “Across-Country Wage Compression in Multinationals” NBER Working Paper No. 26788, February 2020. 

Many employers link wages at the firm’s establishments outside of the home region to the level at headquarters.   This is hard to explain without reference to employees’ concerns with horizontal equity.  This paper shows that these concerns have real effects:  When minimum wage increases in another country cause the company to raise its local wage, the company fires more low-skill workers and hires fewer new workers. 

Böheim, René and Sarah Gust. The Austrian Pay Transparency Law and the Gender Wage Gap  CESifo Working Paper No. 8960, March 2021

Starting in 2011, Austria required large employers to publish reports of pay among their workers. The authors show that this transparency law did not change wages or the gender wage gap.  This study asks whether people view high economic incentives as unfair or coercive.  In a vignette experiment about the ethicality of medical trials, the authors show that a substantial of minority of subjects believes they are.  They think high incentives would cause more people to regret their decisions and view incentivizing poorer participants as being especially repugnant.

Hazell, Jonathon, Christina Patterson Heather Sarsons,and Bledi Taska (2021). “National Wage Setting” unpublished paper, London School of Economics

Using data from large firms that operate in many different parts of the U.S., the authors show that 30-40% of posted wages for a given job within a firm are identical across all the company’s locations, despite dramatic differences in the cost of living and local wage levels.  Using a survey, the authors argue that these firms adopt national wage setting policies at least in part because their workers care about nominal, rather than real, wage comparisons.

Jones, Melanie K. and Ezgi Kaya 2022 Organisational Gender Pay Gaps in the UK: What Happened Post-transparency? IZA discussion paper no. 15342

The authors study gender pay gaps before and after 2017, when the UK required large employers to publicly report their gender pay gap each year. They find greater narrowing of gender pay gaps in organizations with a larger initial gender pay gap. Moreover, this relationship is magnified over time, consistent with gradual and longer-term adjustment.

Guryan, Jonathan, Kory Kroft and Matthew J. Notowidigdo. 2009 “Peer Effects in the Workplace: Evidence from Random Groupings in Professional Golf Tournaments” American Economic Journal: Applied Economics, 1(4), 34-68.

This paper uses random assignment in professional golf tournaments to test for peer effects in the workplace. In contrast to Jennifer Hunt’s study of the effects of Tiger Woods, they authors found no evidence that playing partners' ability affects performance.

Kiessling, Lukas, Jonas Radbruch, and Sebastian Schaube (2022) Self-Selection of Peers and Performance. Management Science 68(11):8184-8201.

This paper studies how the presence of peers and different peer assignment rules—self-selection versus random assignment—affect individual performance. Using a framed field experiment, we find that the presence of a randomly assigned peer improves performance by 28% of a standard deviation (SD), whereas self-selecting peers induces an additional 15%–18% SD improvement in performance. 

Liu, Qi and Bo Sun 2023 Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking American Economic Journal: Microeconomics 2023, 15(2): 568–598

 Suppose that CEO’s care about their relative wealth (compared to other CEOs), not just their absolute wealth.  How would we expect this to affect the types of contracts stockholders offer to CEOs?  The authors show that in equilibrium, all firms might choose to pay CEOs for luck, in addition to paying for performance.  This is because –if other firms are paying for luck—your own risk-averse CEO will value insurance against a compensation shortfall relative to their executive peers.

Effects of Co-Workers’ Performance on Employee Performance

Herbst, Daniel, and Alexandre Mas, (2015). “Peer effects on worker output in the laboratory generalize to the field,” Science, 350(6260):545-549.

Compares estimates of peer effects on worker output in laboratory experiments and field studies from naturally occurring environments. The small mean difference between laboratory and field estimates holds even after controlling for sample characteristics such as incentive schemes and work complexity.  

Kießling, Lukas., Jonas Radbruch, and Sebastian Schaube, (2018). “The Impact of Self-Selection on Performance,” IZA Discussion Papers number 11365.

Examines how self-selected peers affect performance in contrast to randomly assigned ones using a field experiment in physical education classes at secondary schools. Results suggest that self-selected peers improve individual performance relative to randomly assigned peers.

Afridi, Farzana, Amrita Dhillon, and Swati Sharma. 2020 The Ties That Bind Us: Social Networks and Productivity in the Factory IZA discussion paper no. 13711

In a garment manufacturing firm in India, the authors find that a 1 percentage point increase in the share of own-caste workers in the line increases daily individual productivity by about 10 percentage points. The lowest performing worker increases her effort by more than 15 percentage points when the production line has a more homogeneous caste composition.  The authors argue that these large effects are caused by strong complementarities between workers in the production function.  Thus, even in the absence of explicit group-based financial incentives, social networks can be leveraged to improve group productivity.

Brune, Lasse, Eric Chyn, and Jason Kerwin (2020)  Peers and Motivation at Work: Evidence from a Firm Experiment in Malawi  Journal of Human Resources. 

This paper studies workplace peer effects by randomly varying work assignments at a tea estate in Malawi. We find that increasing mean peer ability by 10 percent raises productivity by 0.3 percent. These effects appear to operate through “motivation”:  given the choice to be reassigned, most workers prefer working near high-ability co-workers because these peers motivate them to work harder.

Lindquist, Matthew J., Jan Sauermann, and Yves Zenou 2022 Peer Effects in the Workplace: A Network Approach IZA discussion paper no. 15131

Using data from the in-house call center of a multinational mobile network operator, the authors find that a 10% increase in co-worker current productivity increases worker productivity by 5.3%.  In contrast, a 10% increase in co-worker permanent productivity decreases worker productivity by 3.2%.  Some of the latter effect is explained by older workers, low tenure workers, and low-permanent productivity workers free-riding on co-workers with high levels of permanent productivity.  The authors suggest a way to re-shuffling workers into different teams to reduce this type of free-riding.

 Brune, Lasse, Eric Chyn, and Jason Kerwin Peers and Motivation at Work: Evidence from a Firm Experiment in Malawi Journal of Human Resources, 57(4):1147-1177,

The authors randomly vary work assignments at a tea estate in Malawi. They find that increasing mean peer ability by 10 percent raises productivity by 0.3 percent. This effect is driven by the responses of women. They argue that these effects are driven by “motivation”:  Given the choice to be reassigned, most workers prefer working near high-ability coworkers because these peers motivate them to work harder. 

Battiston, Diego, Jordi Blanes i Vidal, Tom Kirchmaier and Katalin Szemeredi 2022 “Peer Pressure and Manager Pressure in Organisations” unpublished paper, University of Edinburgh.

The authors study how peer pressure among workers interacts with the pressure they receive from their immediate superiors. In a natural experiment at a large organization, individuals work in an open-plan space and, for reasons exogenous to their productivity, their adjacent desks become occupied / unoccupied by co-workers throughout their shift.  They identify a causal, sharp and persistent increase in worker’s productivity following the occupation of an adjacent desk. The authors also study how this ‘peer pressure’ effect interacts with monitoring by managers, arguing that peer pressure is a mechanism used by managers to indirectly influence their workers. exert pressure on their subordinates.

Harrington, Emma, Natalia Emanuel, and Amanda Pallais 2023. The Power of Proximity to Coworkers: Training for Tomorrow or Productivity Today? Unpublished paper, Harvard University.

In an increasingly digital world, how does sitting near coworkers affect collaboration, on-the-job training, and output? The authors study software engineers at a Fortune 500 firm, whose main campus has two buildings several blocks apart. When offices were open, engineers working in the same building as all their teammates received 23 percent more online feedback on their computer code than engineers with distant teammates. After offices closed for COVID-19, this advantage shrank by 17 percentage points. Sitting near coworkers increases how much junior engineers learn from their senior colleagues — not only in person but also online. However, sitting together reduces senior engineers’ programming output, suggesting a trade-off between short-term productivity and long-run human-capital development.