Abstract: 

This paper studies how managers’ choices of compensation schemes are shaped by beliefs about workers’ output, perceptions of fairness, and financial self-interest. In an experiment, participants take the role of managers and choose between a winner-takes-all tournament and an equal-pay scheme for two workers completing a real-effort task. Before choosing, managers report their beliefs about the difference in workers’ output and fairness perceptions across schemes. Most managers expect the tournament scheme to elicit higher output but view it as less fair than the equal-pay scheme, leading many to face a trade-off between promoting output and upholding fairness. Without financial stakes, managers often prioritize fairness and choose the equal-pay scheme. When offered a commission tied to output, however, they shift toward prioritizing output and choose the tournament scheme more often. In addition, managers perceive the tournament scheme as less motivating and less fair for female workers and are less likely to choose it for them. This paper opens the black box of how the choice of incentives is shaped not only by beliefs about effectiveness, but also by fairness concerns and self-interest.

Abstract: 

An influential subset of the literature on distributional preferences studies how preferences condition on characteristics such as workers’ relative productivity. In this study we establish that there are default effects when such conditional fairness preferences are measured using the “inequality acceptance” method. Depending on the default, implemented inequality decreases by over 65% and cross-country differences are not observed. To organize the data, we develop a simple framework in which agents form a reference point based on a combination of the distribution suggested by their fairness ideal and the default. We use this framework to illustrate that choice data from different defaults is needed to separately identify the fairness ideal and effect of the default, and discuss best practices for measuring fairness preferences. 

Abstract: 

The experimental literature on fairness preferences has established that individual perceptions of what earning distributions are fair depends greatly on context. In this paper, we study an important dimension of context that has been largely neglected: whether redistribution occurs through ex ante institutions or through ex post redistribution. We show that contrary to the hypothesis that individuals equalize expected earnings at the time of choice, we find no evidence that subjects are more likely to equalize ex post earnings relative to choosing equal institutions ex ante. Interestingly, our study also suggests that while Scandinavian subjects are more likely to equalize ex post earnings than US subjects, Scandinavian and American subjects look almost identical when they make choices over ex ante institutions.