Incentives under equal-pay constraint and subjective peer evaluation

Abstract

We study a moral hazard problem for a firm with multiple workers where the firm cannot discriminate among workers' wages—equal-pay constraint—and evaluate workers' performances only through peers—subjective peer evaluation. More precisely, each worker privately chooses an effort level, which generates private signals received by his peers. The firm solicits peer evaluations, which are not verifiable. The wage must be equal across workers ex-post. We show that the firm can still provide incentives to put forth effort if (i) the signals are correlated conditional on joint efforts and (ii) higher efforts lead to higher correlation. The proposed wage scheme is optimal within the class of equal-pay contracts, and when workers are symmetric, it is optimal among all wage contracts.