Pay Equality Among Heterogeneous Agents

A principal incentivizes a team of agents to work by choosing performance-contingent rewards. She desires to implement work by all agents as a unique Nash equilibrium. We develop a model in which agents are heterogeneous, both in their costs of effort and marginal contributions to team success. We identify necessary and sufficient conditions under which it is optimal to reward heterogeneous agents equally, and show that increasing inequality in the marginal productivity of agents can either increase or decrease pay inequality. Our results rationalize observed patterns of performance pay in many labor market settings, including professional sports leagues and the military