Games of status and discriminatory contracts |
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| Authors: | Amrita Dhillon Alexander Herzog-Stein |
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| Institution: | 1. Department of Economics, University of Warwick, Coventry, CV4 7AL, UK;2. German Council of Economic Experts, 65180 Wiesbaden, Germany;1. Department of Cardiothoracic Surgery, Southwest Hospital, Third Military Medical University, Chongqing 400038, China;2. College of Bioengineering, Chongqing University, Chongqing 400044, China;1. Pompeu Fabra University and Barcelona GSE, Trias Fargas, 25, 08005 Barcelona, Spain;2. Universita’ di Bologna, Department of Economics, Piazza Scaravilli 2, 40126 Bologna, Italy;1. Department of Quantitative Economics, Maastricht University, P.O. Box 616, 6200MD Maastricht, The Netherlands;2. Department of Knowledge Engineering, Maastricht University, P.O. Box 616, 6200MD Maastricht, The Netherlands |
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| Abstract: | Following recent empirical evidence which indicates the importance of rank for the determination of workers' wellbeing, this paper introduces status seeking preferences in the form of rank-dependent utility functions into a moral-hazard framework with one firm and multiple workers, but no correlation in production. We show that workers' concern for the rank of their wage in the firm's wage distribution induces the firm to offer discriminatory wage contracts when its aim is to induce all workers to expend effort. |
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