”The Last will be First, and the First Last: Segregation in Societies with Relative Payoff Concerns”

In this paper published in the Economic Journal, Riccardo Saulle from the Department of Economics and Management "Marco Fanno" of the University of Padova, Christian Seel and P. Jean-Jacques Herings both from Maastricht University, model two stylized societies: one in which the surplus of firms is shared equally and one in which each worker is paid according to her productivity. Next to a higher absolute pay, individuals also prefer a higher pay relative to their colleagues (relative income hypothesis).

Surprisingly, with equal sharing, less productive individuals may be unemployed, while this does not happen when pay is based on productivity. In the latter case, low-productivity workers with a low salary improve the relative standing of their colleagues and are thus more attractive for firms. These predictions hold true for the traditional solution concept (Core) and the recently developed Myopic Stable Set (Demuynck, Herings, Saulle, and Seel, Econometrica, 2019).

Read the full article here: