Fighting Collusion through Disparity: An Experimental Investigation of the Effect of Pay Dispersion on Collusion in Tournaments.

• In Event: Management Control System Environments

Abstract

Employee collusion weakens the effectiveness of various management control tools. We propose pay dispersion as a potential solution to this problem because it makes employee coordination more difficult. We conduct an experiment where two subordinates compete in a tournament and a superior and the firm benefit from their effort contributions. The two subordinates can collude by both providing a low level of effort, which increases their own payoffs at the cost of the superior and the firm. We manipulate horizontal pay dispersion (i.e., the ex-ante fixed wage gap between the subordinates) and vertical pay dispersion (i.e., the ex-ante fixed wage gap between the subordinates and their superior). Economic theory predicts that ex-ante fixed wage differences should not affect the interest of rational subordinates in collusion. However, based on behavioral theories, we predict and find that both horizontal and vertical pay dispersion reduce collusion and increase effort contribution. Additional data from subordinates’ chat logs and defection decisions suggest that reduced cohesion and trust between subordinates as well as their elevated desire to reduce pay disparity underlies these results. Pay dispersion in organizations has received increasing attention in recent years. Though prior research has documented several negative consequences of high pay dispersion, we document one of its potential benefit.

Authors

• Lan Guo, Wilfrid Laurier University

• Theresa A Libby, University of Waterloo

• Kun Huo, University of Western Ontario