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Reference-dependent preferences in the public and private sectors: A nonlinear perspective

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Author Info
Georgellis, Yannis
Gregoriou, Andros
Tsitsianis, Nikolaos

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Abstract

Although existing studies in the strategic management literature examine the importance of reference points in the context of managerial decisions vis-à-vis organizational performance, there is surprisingly little evidence on how reference earnings affect employees' wellbeing and behavior. The present study closes this gap by investigating adaptation dynamics towards reference earnings in the context of employees’ behavioral responses to social comparisons. We argue that a wedge between actual and aspiration-level earnings causes discontent that spurs employees into action to materialize their aspirations. The robustness of such action depends on the size of the wedge in a nonlinear fashion, a hypothesis supported by our findings. Nevertheless, heterogeneity in behavioral responses is evident across the public and private sectors and across gender and educational attainment. Such heterogeneity could be partially attributed to differences in public service motivation among public and private sector employees, to the different weights that employees place on pecuniary vs. non-pecuniary rewards, and whether reference earnings are likely to trigger behavioral responses through a 'jealousy' or through an 'ambition' channel. These findings have implications for the design of strategic human resource management policies to establish reward structures encouraging employees to adopt risk attitudes that are consistent with an overall business strategic plan.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17021.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:17021

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Related research
Keywords: adaptation; reference earnings; comparison income; reference-dependent preferences; ESTAR models;

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Find related papers by JEL classification:
J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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  2. Brown, Gordon D. A. & Gardner, Jonathan & Oswald, Andrew & Qian, Jing, 2005. "Does Wage Rank Affect Employees’ Wellbeing?," IZA Discussion Papers 1505, Institute for the Study of Labor (IZA). [Downloadable!]
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  8. Henry S. Farber, 2008. "Reference-Dependent Preferences and Labor Supply: The Case of New York City Taxi Drivers," American Economic Review, American Economic Association, vol. 98(3), pages 1069-82, June. [Downloadable!]
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  10. Claudia Senik, 2008. "Ambition and Jealousy: Income Interactions in the 'Old' Europe versus the 'New' Europe and the United States," Economica, London School of Economics and Political Science, vol. 75(299), pages 495-513, 08. [Downloadable!] (restricted)
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  11. McBride, Michael, 2001. "Relative-income effects on subjective well-being in the cross-section," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 251-278, July. [Downloadable!] (restricted)
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