Abstract: 

The structure of compensation schemes determines both the incentives workers face and the distribution of their income. A larger pay difference between high and low performers creates stronger incentives to produce, but also creates greater inequality that may be perceived as unfair. In an experiment, I show that most participants expect a winner-takes-all tournament scheme to drive higher output than an equal-pay scheme, but view it as less fair. Thus, when choosing one to pay a pair of workers, they encounter a trade-off between maximizing output and ensuring fairness. Using a between-subject design, I find that how they handle the trade-off depends on whether their own compensation is linked to worker output. Without personal stakes, most prefer the fairer equal-pay scheme, accepting a lower expected output. However, the influence of fairness concerns diminishes when they earn a proportional commission on worker output, leading most to favor the tournament scheme in anticipation of higher personal income. This paper suggests that individual fairness preferences play a significant role in managerial decision-making, sometimes outweighing considerations of both personal income and firm efficiency.

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.

Abstract: 

Most of the fairness preferences studies compare people’s preferences over inequalities generated by different sources that may be perceived as fair or unfair. However, inequality by itself influences people’s subsequent behaviors. We use a novel experimental design that isolates fairness from inequality to identify its impact, in which subjects face identical situations – they made the same choice, exerted the same amount of effort, and earned the same with their counterparties. The only difference between treatments is whether their counterparties worked the same or less than them, representing cases of fair and unfair equality. Preliminary results show that while being exposed to unfair equality does not cause subjects to act more selfishly later, going through a fair experience makes them place higher emphasis on fairness in subsequent distributional choices.