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Complementarity and Custom in Contract Violation

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Author Info
John S. Earle () (W.E. Upjohn Institute for Employment Research and Central European University)
Klara Sabirianova Peter (Georgia State University, CEPR, and IZA)

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Abstract

We analyze a model of wage delay in which strategic complementarity arises because each employer's costs of violating its contracts decrease with the arrears in its labor market. The model is estimated on panel data for workers and firms in Russia, facilitating identification through fixed effects for employees, employers, and local labor markets, and instrumental variables based on policy interventions. The estimated reaction function displays strongly positive neighborhood effects, and the estimated feedback loops – worker quits, effort, strikes, and legal penalties – imply that costs of wage delays are attenuated by neighborhood arrears. We also study a nonlinear case with two stable equilibria: a punctual payment and a late payment equilibrium. The estimates imply that the theoretical conditions for multiple equilibria under symmetric labor market competition are satisfied in our data.

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Publisher Info
Paper provided by W.E. Upjohn Institute for Employment Research in its series Staff Working Papers with number 06-129.

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Date of creation: Jul 2006
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Handle: RePEc:upj:weupjo:06-129

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Related research
Keywords: Earle; Sabirinova; contract violation; wage arrears; social custom; strategic complementarity; neighborhood effect; social interactions; multiple equilibria; network externality; transition; Russia";

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out
P23 - Economic Systems - - Socialist Systems and Transition Economies - - - Factor and Product Markets; Industry Studies; Population
P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Institutional; Evolutionary
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
P37 - Economic Systems - - Socialist Institutions and Their Transitions - - - Legal

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