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Pay Gap and Firm Innovation in China
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TitlePay Gap and Firm Innovation in China  
AuthorKong Dongmin,Xu Mingli and Kong Gaowen  
OrganizationHuazhong University of Science and Technology;Jinan University;; 
Key WordsPay gap; Innovation; Pay Premium; Human Capital; Ownership  
AbstractAlthough the pay gap between executives and employees has received considerable attention, its economic consequences remain unclear due to the unavailability of data. In this study, we examine the effects of the pay gap on firm innovation by using data from Chinese listed companies. We show that: 1) pay gaps between management and employees enhance firm innovation, supporting the tournament theory in firm innovation activities; 2) the relationship between pay gaps and firm innovation exhibits an “inverted-U”, pay gaps reduce innovation outputs insignificantly when the gap is relatively large, indicating the effects of the comparison theories become apparent as pay gap increases; 3) high management pay premiums provide incentives for management to devote to innovation activities, while pay premiums for ordinary employees impede firm innovation; and 4) both the employee’s human capital and state ownership play significant roles in the negative effects of employee pay premiums on firm innovation. Overall, we provide critical insights and a serious challenge for regulators in China. The policy implications of this study could be of interest to regulators who intend to encourage firm innovation. 
Serial NumberWP1223 
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