We develop a general theoretical model of the effect of wage dispersion on team performance which nests two possibilities: wage inequality may have either negative or positive effects on team performance. A parameter which captures the marginal cost of effort, which we estimate using game-level data from Major League Baseball, determines whether wage dispersion and team performance are negatively or positively related. We find low marginal cost of effort; consequently, wage disparity is negatively related to team performance. Game and season-level regressions also indicate a negative relationship between inequality and performance. We discuss a variety of interpretations of our results.
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Breunig et al. (2013) studied this question.
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