Abstract
Jay Stewart (1995) "Adverse Selection and Pay Equity."
Previous studies have shown that adverse incentives can lead firms to weaken the link
between pay and performance, which leads to more equal pay across workers. In these
models, high-powered incentives encourage workers to neglect some aspects of their job, or
to sabotage their co-workers' efforts. This paper offers another explanation for the weak
link between pay and performance. When labor contracts are contests, the Nash equilibrium
often pools workers. This implies that incentives are weaker than would be the case if
firms could observe workers types before contracting and offer each type their respective
optimal contests.
Last Modified Date: July 19, 2008
|