TY  - JOUR
AU  - Charness,Gary
AU  - Kuhn,Peter
TI  - Pay Inequality, Pay Secrecy, and Effort: Theory and Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11786
PY  - 2005
Y2  - November 2005
UR  - http://www.nber.org/papers/w11786
L1  - http://www.nber.org/papers/w11786.pdf
N1  - Author contact info:
Gary Charness
UC, Santa Barbara
E-Mail: charness@econ.ucsb.edu

Peter J. Kuhn
Department of Economics
University of California, Santa Barbara
2127 North Hall
Santa Barbara, CA  93106
Tel: 805/893-3666
Fax: 805/893-8830
E-Mail: pjkuhn@econ.ucsb.edu
AB  - We study worker and firm behavior in an efficiency-wage environment where co-workers' wages may potentially influence a worker's effort. Theoretically, we show that an increase in workers' responsiveness to co-workers' wages should lead profit-maximizing firms to compress wages under quite general conditions. Our laboratory experiments, on the other hand, show that --while workers' effort choices are highly sensitive to their own wages-- effort is not affected by co-workers' wages. As a consequence, even though firms in our experiment tended to compress wages when wages became public information, this did not raise their profits. Our experimental evidence therefore provides little support for the notion that inter-worker equity concerns can make wage compression, or wage secrecy, a profit-maximizing policy.
ER  -