The pond dilemma with heterogeneous relative concerns

This paper explores team formation when workers differ in skills and their<br/>desire to out-earn co-workers. I cast this question as a two-dimensional assignment problem, characterise the equilibrium sorting and payoffs for three large classes of specifications, and find that heterogeneity in status preferences drastically changes the distributional and organisational consequences of skill-biased technological change (SBTC). Strikingly, the benefits of SBTC trickle down to low-skill workers with weak relative concerns even when there are no complementarities in production. Moreover, SBTC incentivises domestic outsourcing, as firms seek to avoid detrimental social comparisons between high- and low-skill workers, which provides a compelling explanation for the observed long-term increase in domestic outsourcing.