The Economic Consequences of Transparency

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Swissotel Chicago, Zurich F
Hosted By: American Economic Association
  • Chair: Gordon Dahl, University of California-San Diego

The Effects of Income Transparency on Well-Being: Evidence From a Natural Experiment

Ricardo Perez-Truglia
,
Microsoft Research and University of California-Los Angeles

Abstract

In 2001, Norwegian tax records became easily accessible online, allowing individuals to observe the incomes of others. Because of self-image and social-image concerns, higher income transparency can increase the differences in well-being between rich and poor. We test this hypothesis using survey data from 1985-2013. We identify the causal effect of income transparency on subjective well-being by using differences-in-differences, triple-differences, and event-study analyses. We find that higher income transparency increased the happiness gap between rich and poor by 29% and the life satisfaction gap by 21%. Additionally, higher income transparency corrected misperceptions about the income distribution and changed preferences for redistribution. Last, we use the estimates for back-of-the-envelope calculations of the value of self-image and social-image.

Does Disclosure Affect CEO Pay Setting? Evidence From the Passage of the 1934 Securities and Exchange Act

Alexandre Mas
,
Princeton University

Abstract

Using newly digitized data from the Federal Trade Commission, I examine the evolution of executive compensation during the Great Depression, before and after mandated pay disclosure in 1934. I find that disclosure did not achieve the intended effect of broadly lowering CEO compensation. If anything, and in spite of popular outrage against compensation practices, average CEO compensation increased following disclosure relative to the upper quantiles of the non-CEO labor income distribution. Pay disclosure coincided with compression of the CEO earnings distribution. Following disclosure there was a pronounced drop in the residual variance of earnings—computed with size and industry controls—that accounts for almost the entire drop in the unconditional variance. The evidence suggests an upward “ratcheting” effect whereby lower paid CEOs given the size and industry of their firm experienced relative gains while well paid CEOs conditional on these characteristics were not penalized. The exception is at the extreme right-tail of the CEO distribution which fell precipitously, suggesting that disclosure may only have restrained only the most salient and visible wages.

The Morale Effects of Pay Inequality

Supreet Kaur
,
Columbia University
Emily Breza
,
Columbia University
Yogita Shamdasani
,
Columbia University

Abstract

The idea that worker utility is affected by co-worker wages has potentially broad implications for the labor market–for example, through wage compression, wage rigidity, firm boundaries, and the distribution of earnings. We use a month-long field experiment with Indian manufacturing workers to test whether relative pay comparisons affect labor supply, effort, and social cohesion. In our setting, workers are paid a flat daily wage and organized into distinct product teams. We randomize teams to receive either compressed wages (where all teammates earn the same wage) or pay disparity (where each team member is paid a different wage according to his baseline productivity rank). First, for a given absolute wage level, workers are less likely to come to work under pay disparity—regardless of their relative pay rank. Second, output is lower on pay disparity teams; workers who earn less their peers reduce output by 0.33 standard deviations. These effects strengthen in later weeks. Third, performance on endline teamwork tasks suggests that pay disparity erodes social cohesion: team members are less able to cooperate in their own self-interest. Finally, the perceived justification for pay differences plays an essential role in mediating morale effects. When pay differences are clearly justified—coworker output is highly observable, or one’s higher-paid co-workers are substantially more productive than oneself (in terms of baseline productivity)—we detect no negative effects of pay disparity on attendance, output, or team cohesion.

Equal Pay for Equal Work? Evidence From the Renegotiations of Short-Term Work Contracts Online

Zoe Cullen
,
Stanford University
Bobak Pakzad-Hurson
,
Stanford University

Abstract

We show empirically why employers pay similar wages to heterogeneous workers. Analysis of administrative data of an online labor platform specializing in local short-term contracts reveals three facts. First, for a particular multiworker job, pay among workers differs on average by over fifty percent when workers are the first to propose a price. Second, when workers are in the same location, employers deliberately raise the pay of lower bidders, reducing dispersion, irrespective of differences in assessed productivity or reservation values. Finally, the same employer that compresses pay when workers are co-located will allow disparities when workers are physically separated. The key distinction between settings is the transparency of relative pay. The impact of pay transparency on pay equalization is consistent with a pure information channel where knowledge of co-worker pay changes the bargaining position of the worker. The employer may also find it efficient to equalize pay when relative allocations enter directly into the worker's utility function. We conduct a field experiment that underscores the contribution of both these channels to the equilibrium behavior of employers we observe in administrative data from the same environment.
Discussant(s)
Johanna Mollerstrom
,
Humboldt University
Jie Bai
,
Massachusetts Institute of Technology
Ugo Troiano
,
University of Michigan
Laszlo Sandor
,
University of Luxembourg
JEL Classifications
  • H8 - Miscellaneous Issues
  • J3 - Wages, Compensation, and Labor Costs