Arbeitspapier

A Theory of Intra-Firm Group Design

I develop an intra-firm theory of group design and teamwork in the presence of peer effects. The purpose is to understand the interlinkages between intra-firm group formation and the extent of wage dispersion within the firm. Given a set of heterogeneous workers, the manager faces the challenge of allocating workers into endogenous groups (or teams) to maximize total profits. The optimal allocation features locational proximity between workers with similar productivity levels. I discuss the implications of this allocation on intra-firm wage outcomes. The main idea is that the wage paid to a single worker is determined by the productivity levels of the teammates as well as the worker's own productivity. This means that team composition is critical to understanding the within-firm productivity and wage differentials. I show that intra-firm wage dispersion is more pronounced when workers are more alike within each team and more different across the teams. I provide numerical exercises designed to illustrate how the model's predictions change as the key parameters are varied. One striking result is that a rise in the correlation between education and productivity (this can be interpreted as hiring workers with vocational education) leads to a decline in wage inequality within the firm. I also show that changes in the dispersion of worker efficiency lead to non-monotonic effects on within-firm wage inequality.

Language
Englisch

Bibliographic citation
Series: IZA Discussion Papers ; No. 9473

Classification
Wirtschaft
Wage Level and Structure; Wage Differentials
Firm Organization and Market Structure
Organization of Production
Personnel Economics: Firm Employment Decisions; Promotions
Personnel Economics: Compensation and Compensation Methods and Their Effects
Subject
group design
peer effects in the workplace
within-firm pay differences
sorting
selectivity

Event
Geistige Schöpfung
(who)
Tumen, Semih
Event
Veröffentlichung
(who)
Institute for the Study of Labor (IZA)
(where)
Bonn
(when)
2015

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Tumen, Semih
  • Institute for the Study of Labor (IZA)

Time of origin

  • 2015

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