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

Author

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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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    Keywords

    Reference dependence; Loss aversion; Asymmetric reciprocity; Downward wage rigidity;

    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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