Cultural Diversity, Status Concerns, and the Organization of Work

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.