Working Paper: CEPR ID: DP16177
Authors: Ron Kaniel; Peter DeMarzo
Abstract: We consider multi-agent multi-firm contracting when agents benchmark their wages to their peers’, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals a “rat race” emerges: agents are more productive, with effort that can exceed the first-best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contract structure (L14) | wage outcomes (J31) |
| peer output (G35) | wages (J31) |
| peer effects (C92) | wage structures (J31) |
| rat race among agents (L85) | productivity and effort (O49) |
| rat race among agents (L85) | reduced profits and efficiency (D24) |
| wage transparency (J31) | wage dynamics (J31) |
| asymmetric peer effects (C92) | profits (L21) |