Incentive contracts with pay gap and pay equity

Abstract

This paper explores the impact of non-standard work hours on job performance, with a particular focus on the gender pay gap within the principal–agent model. We develop a moral hazard model that introduces a gender-specific dimension, examining the relationship between optimal contracts and performance pay disparities. We explore two distinct scenarios—one featuring different pay and another with equal pay. The situation with different pay enables us to discern the factors contributing to the wage gap between the two workers. Upon examining the scenario where the contract is constrained to equal pay, we identify two noteworthy outcomes within the optimal contract. Firstly, the compensation structure shifts toward dependence on relative performance, departing from the independent performance evaluation observed in scenarios with different pay. Secondly, equal pay decreases the likelihood of having both the glass ceiling and glass cliff phenomena.