Social Preferences, Sorting, and Competition

This paper investigates how an increase in competition for workers infuences the impact of social preferences on labor market outcomes. By sorting into firms with homogeneous work forces, workers can alleviate their suffering from social comparisons. Competition promotes choice and thus facilitates sorting. But competition also boosts rent differences in the labor market as firms cannot curb internal inequity among its employees without losing workers to competitors. To reduce their exposure to social comparisons, workers might engage in inefficient sorting into unemployment. Consequently, social preferences can have strong effects - unemployment - in a competitive labor market, whereas they have only little impact on labor market outcomes in a monopsony