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Complementarity and Custom in Contract Violation

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  • John S. Earle

    (W.E. Upjohn Institute for Employment Research and Central European University)

  • Klara Sabirianova Peter

    (Georgia State University, CEPR, and IZA)

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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Paper provided by W.E. Upjohn Institute for Employment Research in its series Upjohn Working Papers and Journal Articles 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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Keywords: Earle; Sabirinova; contract violation; wage arrears; social custom; strategic complementarity; neighborhood effect; social interactions; multiple equilibria; network externality; transition; Russia";

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Cited by:
  1. Gorodnichenko, Yuriy & Peter, Klara Sabirianova & Stolyarov, Dmitriy, 2009. "Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income," IZA Discussion Papers 4233, Institute for the Study of Labor (IZA).

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