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Modularizing a system, a product, or a process can have positive effects on performance in many instances. That it may have adverse consequences has also been discussed, although on balance the literature seems inclined to consider that modularity is desirable in most cases. In this paper, we put forward a feature of modular systems that extant research has not considered in spite of its strong performance-hindering potential. Starting from the premise that organizations are essentially patterns of formal and informal interactions, and modules within organizations are places where these interactions accumulate and reinforce, we argue that modularity can exacerbate issues related to (low-)performance spillovers from one organizational actor to another. With psychosocial affect as the channel connecting the formal and the informal spheres, we develop a simple model that combines elements of psychology research, network science, and organization theory to study how formal and informal elements jointly determine organizational performance under different modularity configurations. We find that organizational performance is lower when the alignment of formal and informal is stronger: informal interaction augments local accumulation of stress caused by formal aspects of firm organization. However, this result depends heavily on the modularity of formal organization: feedbacks between formal and informal elements cause much harsher performance degradation in modular systems. This suggests the exercise of caution when considering the possibility to modularize a production system.

Labor market opportunities and wages may be unfair for various reasons, and how workers respond to different types of unfairness can have major economic consequences. Using an online labor platform, where workers engage in an individual task for a piece-rate wage, we investigate the causal effect of neutral and gender-discriminatory unfair chances on labor supply. We randomize workers into treatments where we control relative pay and chances to receive a low or a high wage. Chances can be fair, unfair based on an unspecified source, or unfair based on gender discrimination. Unequal pay reduces labor supply of low-wage workers, irrespective of whether the low wage is the result of fair or unfair chances. Importantly, the source of unfair chances matters. When a low wage is the result of gender-discriminatory chances, workers matched with a high-wage worker substantially reduce their labor supply compared to the case of equal low wages (−22%). This decrease is twice as large as those induced by low wages due to fair chances or unfair chances coming from an unspecified source. In addition, exploratory analysis suggests that in response to unequal pay, low-wage male workers reduce labor supply irrespective of the source of inequality, whereas low-wage female workers reduce labor supply only if unequal pay is due to gender-discriminatory chances. Our results concerning gender discrimination indicate a new reason for the lower labor supply of women, which is a prominent explanation for the gender gap in earnings.