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

Author

Listed:
  • Alex Dickson

    (University of Strathclyde [Glasgow])

  • Marco Fongoni

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

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

  • Alex Dickson & Marco Fongoni, 2019. "Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract," Post-Print hal-05547603, HAL.
    • Handle: RePEc:hal:journl:hal-05547603
    DOI: 10.1016/j.jebo.2019.05.006
    Note: View the original document on HAL open archive server: https://hal.science/hal-05547603v1
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