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Contract Violations, Neighborhood Effects, And Wage Arrears In Russia

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  • John S. Earle

    ()

  • Klara Sabirianova Peter

    ()

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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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan 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
Date of revision:
Handle: RePEc:wdi:papers:2004-708

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

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Cited by:
  1. Linz, Susan J. & Semykina, Anastasia, 2008. "How do workers fare during transition? Perceptions of job insecurity among Russian workers, 1995-2004," Labour Economics, Elsevier, vol. 15(3), pages 442-458, June.
  2. Lehmann, Hartmut & Pignatti, Norberto & Wadsworth, Jonathan, 2006. "The incidence and cost of job loss in the Ukrainian labor market," Journal of Comparative Economics, Elsevier, vol. 34(2), pages 248-271, June.

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