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Why Startups Pay More: Compensation Premiums Beyond Risk Factors

Year: 2025

Type: article

Abstract: We propose a rationale for the existence of compensation premiums in startups that extends beyond traditional risk-based explanations. The mechanism hinges on the elasticity of substitution between inputs. When workers’ efforts are substitutes, the entrepreneur resolves the group dilemma within teams by offering a compensation scheme that yields utility levels above workers’ reservation utilities. In contrast, when efforts are complements, the compensation premium enables coordination on more efficient outcomes in a game with multiple symmetric equilibria.

Source: The B E Journal of Economic Analysis & Policy

DOI: 10.1515/bejeap-2025-0156

Authors: Marta Ruiz-Delgado, Miguel A. Meléndez-Jiménez, Antonio J. Morales

Institution: Universidad de Málaga

Language: English

Topic: Experimental Behavioral Economics Studies

Subfield: Safety Research

Field: Social Sciences

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $2,712