Cultural Diversity, Status Concerns and the Organization of Work

Abstract

A well-documented human tendency is to compare outcomes with others, trying to outperform them. These tendencies vary across cultures and among different individuals in a given society. To understand the implications of such diversity in status considerations on wages, contracts, sorting and output we use a standard principal agent framework in which firms consist of two workers and a principal. We find that, in equilibrium, firms mix workers with different status concerns to enhance ‘cultural trade’. Although workers may have the same productivity, equilibrium will generate a dispersion in (expected) wages, and workers with status concerns will have more high-powered incentives, work more and earn more than workers who do not care about status. Finally, we find that a more diverse workforce can increase the total output of the economy. This increase in output is a result of the higher effort exerted by the status minded workers that offsets the reduction in effort by those who do not care about status.

Citation

Fershtman, C., Hvide, H.K. and Weiss, Y. (2006), "Cultural Diversity, Status Concerns and the Organization of Work", Polachek, S.W., Chiswick, C. and Rapoport, H. (Ed.) The Economics of Immigration and Social Diversity (Research in Labor Economics, Vol. 24), Emerald Group Publishing Limited, Leeds, pp. 361-396. https://doi.org/10.1016/S0147-9121(05)24011-6