Status Concerns and the Organization of Work

We study the effects of local status, where workers compare their wage to the wage of other workers within the same firm. We assume a competitive labor market with unobservable effort, where firms condition wages on output as incentive for effort. If workers who care about status are also more productive, such status concerns generate an equilibrium with heterogenous firms where workers who care and workers who do not care about status work together . Such firms provide workers who care about status with stronger incentives to exert effort, compared with workers who do not care. In addition, there will be homogenous firm who employ workers of the same type. The main result is that wage differences within heterogenous firms exceed the wage differences across homogenous firms. The difference from previous studies (e.g., Frank 1984) is that effort is elastically supplied and the payment for status is influenced by the relative supply of workers who care and do not care about status. The positive correlation between status concerns and productivity is derived as part of the equilibrium, because workers who care about status signal their stronger motivation through investment in schooling. These results are maintained if one adds risk aversion and global status concerns, where workers also care about the average wage in society. ∗Tel-Aviv University †NHH ‡Tel-Aviv University