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Incentive contracts with pay gap and pay equity

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  • Kim, Jaesoo

Abstract

This paper explores the impact of non-standard work hours on job performance, with a particular focus on the gender pay gap within the principal–agent model. We develop a moral hazard model that introduces a gender-specific dimension, examining the relationship between optimal contracts and performance pay disparities. We explore two distinct scenarios—one featuring different pay and another with equal pay. The situation with different pay enables us to discern the factors contributing to the wage gap between the two workers. Upon examining the scenario where the contract is constrained to equal pay, we identify two noteworthy outcomes within the optimal contract. Firstly, the compensation structure shifts toward dependence on relative performance, departing from the independent performance evaluation observed in scenarios with different pay. Secondly, equal pay decreases the likelihood of having both the glass ceiling and glass cliff phenomena.

Suggested Citation

  • Kim, Jaesoo, 2024. "Incentive contracts with pay gap and pay equity," Labour Economics, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:labeco:v:91:y:2024:i:c:s0927537124001477
    DOI: 10.1016/j.labeco.2024.102651
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    References listed on IDEAS

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    More about this item

    Keywords

    Contracts; Moral hazard; Pay gap; Pay equity; Glass ceiling; Glass cliff;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services

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