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Equilibrium Wage Arrears: A Theoretical and Empirical Analysis of Institutional Lock-In

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  • Earle, John S.

    ()
    (George Mason University)

  • Peter, Klara Sabirianova

    ()
    (University of North Carolina, Chapel Hill)

Abstract

We present a model of wage contract violation that implies a possibility of multiple equilibria in the level of arrears. Positive feedback arises because each employer’s arrears affect the costs of late payment faced by other employers operating in the same labor market, resulting in a network externality or strategic complementarity in the adoption of the practice. We study the case of three equilibria, distinguishing two that are stable: the "punctual payment equilibrium" and the "late payment equilibrium." Our econometric analysis of linked employer-employee data for Russia supports the model’s contention that the firm’s costs of wage arrears - as embodied in worker effort, quit and strike behavior, and the probability of legal penalties - are attenuated by arrears in the local labor market. We estimate the arrears reaction function implied by the model, showing that it exhibits strongly positive feedback, and that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in 1995 and 1998. Simulation results imply a late payment equilibrium characterized by six monthly overdue wages for a typical worker in 1995 and nine in 1998.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 196.

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Length: 54 pages
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:iza:izadps:dp196

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Related research

Keywords: social interactions; institutional lock-in; institutions; contractual failure; Wage arrears; Russia; transition;

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References

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Citations

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Cited by:
  1. John S. Earle & Andrew Spicer & Klara Sabirianova Peter, 2004. "Community Norms and Organizational Practices: The Legitimization of Wage Arrears in Russia, 1992-1999," William Davidson Institute Working Papers Series 2004-641, William Davidson Institute at the University of Michigan.
  2. Lehmann, Hartmut & Wadsworth, Jonathan, 2001. "Wage Arrears and the Distribution of Earnings in Russia," IZA Discussion Papers 410, Institute for the Study of Labor (IZA).
  3. Guriev, Sergei & Makarov, Igor & Maurel, Mathilde, 2001. "Debt Overhang and Barter in Russia," CEPR Discussion Papers 2686, C.E.P.R. Discussion Papers.
  4. Konstantin Sonin, 2002. "Why the Rich May Favor Poor Protection of Property Rights," William Davidson Institute Working Papers Series 544, William Davidson Institute at the University of Michigan.
  5. Ksenia Yudaeva, 2002. "Globalization and Inequality in CIS Countries: Role of Institutions," Working Papers w0025, Center for Economic and Financial Research (CEFIR).
  6. Lilia Maliar & Serguei Maliar, 2003. "A Neoclassical Theory Of Wage Arrears In Transition Economies," Working Papers. Serie AD 2003-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  7. Boyarchuk, Dmytro & Maliar, Lilia & Maliar, Serguei, 2005. "The consumption and welfare implications of wage arrears in transition economies," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 540-564, September.

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