Is Transparency Enough? The Effect of Historical Pay Information on Negotiations

Abstract

A commonly cited cure for pay inequality is pay transparency, because access to peer pay is believed to prompt underpaid individuals to negotiate. We analytically and empirically study how historical peer pay information influences pay negotiations and pay inequality. We build a reference-dependent behavioral model to capture the notion that some workers believe they deserve a higher pay than peers in the same market because they perceive their abilities as better than the average. Our model predicts that, when the revealed historical peer pay is higher than or the same as the current pay offer, pay transparency may induce workers with high self-perceived abilities (who are likely already highly-paid) to ask for more, which may in turn exacerbate pay inequality among hired workers. These predictions and the proposed mechanism are consistent with three field and lab experiments on online labor platforms. Furthermore, we conduct extensive numerical simulations based on our model to identify the conditions under which pay transparency is most likely to amplify pay inequality in the long run. Our work highlights that pay transparency may not always be a panacea for pay inequality, and discusses measures that can be taken along with pay transparency to combat pay inequality.

Keywords: Reference Points, Transparency, Negotiation, Pay Inequality, Online Labor Platform