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Contract Violations, Neighborhood Effects, And Wage Arrears In Russia

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Author Info
John S. Earle ()
Klara Sabirianova Peter ()

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Abstract

We present a model of neighborhood effects in wage payment delays. Positive feedback arises because each employer’s arrears affect the late payment costs faced by other firms in the same local labor market, resulting in a strategic complementarity in the practice. The model is estimated on panel data for workers and firms in Russia, facilitating identification through the use of a rich set of covariates and fixed effects for employees, employers, and local labor markets. We also exploit a policy intervention affecting public sector workers that provides an instrumental variable to estimate the endogenous reaction in the non-public sector. Consistently across specifications, the estimated reaction function displays strongly positive neighborhood effects, and the estimates of four feedback loops – operating through worker quits, effort, strikes, and legal penalties – imply that costs of delays are attenuated by neighborhood arrears. We also study a nonlinear case exhibiting two stable equilibria: a “punctual payment equilibrium” and a “late payment equilibrium.” The estimates imply that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in our data.

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 2004-708.

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Length: 49 pages
Date of creation: 01 Jul 2004
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Handle: RePEc:wdi:papers:2004-708

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

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Find related papers by JEL classification:
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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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hartmut Lehmann & Norberto Pignatti & Jonathan Wadsworth, 2005. "The Incidence and Cost of Job Loss in the Ukrainian Labor Market," CERT Discussion Papers 0504, Centre for Economic Reform and Transformation, Heriot Watt University. [Downloadable!]
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