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: 

To address rising income inequality, governments typically rely on two levers: predistribution policies that determine incomes before they are earned---e.g. minimum-wage laws---and redistribution policies that determine incomes after they are earned---e.g. taxes and transfers. We explore whether support for reducing inequality depends on the choice of policy lever. Using incentivized experiments with the general population of the US and Sweden (N=2528), we study inequality reduction under predistribution and redistribution, focusing on whether the income decision is made before or after income is earned. We find that timing matters: subjects in both countries reduce inequality more under predistribution than redistribution. Furthermore, subjects in the predistribution treatment more often invoke equal effort to justify reducing inequality, while those in the redistribution treatment more often invoke adherence to the initial agreement to justify preserving it. Overall, our results imply that the choice between predistribution and redistribution can influence public support for reducing inequality.erican subjects look almost identical when they make choices over ex ante institutions.