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Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract

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  • Dickson, Alex
  • Fongoni, Marco

Abstract

We develop a model of asymmetric reciprocity and optimal wage setting based on contractual incompleteness, fairness, and reference dependence and loss aversion in the evaluation of wages by workers. The model establishes a positive wage-effort relationship capturing a worker’s ‘asymmetric reference-dependent reciprocity’, in which loss aversion implies negative reciprocity is stronger than positive reciprocity. Our theory provides an explanation for the observed asymmetry and dynamics of workers’ reciprocity and establishes a micro-foundation for downward wage rigidity, the implications of which shed new light on a forward-looking firm’s optimal wage setting and hiring decisions.

Suggested Citation

  • Dickson, Alex & Fongoni, Marco, 2019. "Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 409-429.
  • Handle: RePEc:eee:jeborg:v:163:y:2019:i:c:p:409-429
    DOI: 10.1016/j.jebo.2019.05.006
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    Cited by:

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    2. Jose Rojas-Fallas & J. Forrest Williams, 2020. "Wage Differences Matter: An Experiment of Social Comparison and Effort Provision when Wages Increase or Decrease," Games, MDPI, Open Access Journal, vol. 11(4), pages 1-12, December.
    3. Laszlo Goerke, 2020. "An Efficiency-Wage Model with Habit Concerns about Wages," CESifo Working Paper Series 8428, CESifo.
    4. Christian Koch, 2021. "Can reference points explain wage rigidity? Experimental evidence," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 55(1), pages 1-17, December.
    5. Daniel Schaefer & Carl Singleton, 2020. "Nominal Wage Adjustments and the Composition of Pay: New Evidence from Payroll Data," Economics Discussion Papers em-dp2020-01, Department of Economics, Reading University.
    6. Laszlo Goerke, 2021. "Habit formation and wage determination," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(1), pages 61-76, January.

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    More about this item

    Keywords

    Reference dependence; Loss aversion; Asymmetric reciprocity; Downward wage rigidity;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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