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The Pond Dilemma with Heterogeneous Relative Concerns

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  • Pawe{l} Gola

Abstract

This paper explores team formation when workers differ in skills and their desire to out-earn co-workers. I cast this question as a two-dimensional assignment problem with imperfectly transferable utility and show that equilibrium sorting optimally trades off output maximisation with the need to match high-skill workers to co-workers with weak relative concerns. This can lead to positive (negative) assortative matching in skill even with submodular (supermodular) production functions. Under supermodular production, this heterogeneity in preferences benefits all workers and reduces wage inequality. With submodular production, the distributional consequences are ambiguous, and some workers become worse off. The model reveals that skill-biased technological change (SBTC) incentivises domestic outsourcing, as firms seek to avoid detrimental social comparisons between high- and low-skill workers, thus providing a compelling explanation for the long-term increase in outsourcing. Finally, the benefits of SBTC can trickle down to low-skill workers-but only those whose relative concerns are weak.

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  • Pawe{l} Gola, 2024. "The Pond Dilemma with Heterogeneous Relative Concerns," Papers 2410.12566, arXiv.org.
  • Handle: RePEc:arx:papers:2410.12566
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    1. Robert McCann & Maxim Trokhimtchouk, 2010. "Optimal partition of a large labor force into working pairs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 42(2), pages 375-395, February.
    2. Ilse Lindenlaub, 2017. "Sorting Multidimensional Types: Theory and Application," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 718-789.
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