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Equilibrium Wage Arrears: A Theoretical and Empirical Analysis of Institutional Lock-In

Author

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  • Earle, John S.

    () (George Mason University)

  • Peter, Klara Sabirianova

    () (University of North Carolina, Chapel Hill)

Abstract

We present a model of wage contract violation that implies a possibility of multiple equilibria in the level of arrears. Positive feedback arises because each employer’s arrears affect the costs of late payment faced by other employers operating in the same labor market, resulting in a network externality or strategic complementarity in the adoption of the practice. We study the case of three equilibria, distinguishing two that are stable: the "punctual payment equilibrium" and the "late payment equilibrium." Our econometric analysis of linked employer-employee data for Russia supports the model’s contention that the firm’s costs of wage arrears - as embodied in worker effort, quit and strike behavior, and the probability of legal penalties - are attenuated by arrears in the local labor market. We estimate the arrears reaction function implied by the model, showing that it exhibits strongly positive feedback, and that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in 1995 and 1998. Simulation results imply a late payment equilibrium characterized by six monthly overdue wages for a typical worker in 1995 and nine in 1998.

Suggested Citation

  • Earle, John S. & Peter, Klara Sabirianova, 2000. "Equilibrium Wage Arrears: A Theoretical and Empirical Analysis of Institutional Lock-In," IZA Discussion Papers 196, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp196
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    Cited by:

    1. Kupets, Olga, 2006. "Determinants of unemployment duration in Ukraine," Journal of Comparative Economics, Elsevier, vol. 34(2), pages 228-247, June.
    2. Boyarchuk, Dmytro & Maliar, Lilia & Maliar, Serguei, 2005. "The consumption and welfare implications of wage arrears in transition economies," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 540-564, September.
    3. Guriev, Sergei & Makarov, Igor & Maurel, Mathilde, 2002. "Debt Overhang and Barter in Russia," Journal of Comparative Economics, Elsevier, vol. 30(4), pages 635-656, December.
    4. World Bank, 2003. "The Russian Labor Market : Moving from Crisis to Recovery," World Bank Publications, The World Bank, number 15007, November.
    5. Sonin, Konstantin, 2003. "Why the rich may favor poor protection of property rights," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 715-731, December.
    6. Lilia Maliar & Serguei Maliar, 2003. "A Neoclassical Theory Of Wage Arrears In Transition Economies," Working Papers. Serie AD 2003-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    7. John S. Earle & Andrew Spicer & Klara Z. Sabirianova, 2003. "Community Norms and Organizational Practices: The Legitimization of Wage Arrears in Russia, 1992-1999," Upjohn Working Papers and Journal Articles 03-97, W.E. Upjohn Institute for Employment Research.
    8. Hartmut Lehmann & Jonathan Wadsworth, 2001. "Wage Arrears and the Distribution of Earnings in Russia," William Davidson Institute Working Papers Series 421, William Davidson Institute at the University of Michigan.
    9. Guido Friebel & Sergei Guriev, 2005. "Attaching Workers through In-Kind Payments: Theory and Evidence from Russia," World Bank Economic Review, World Bank Group, vol. 19(2), pages 175-202.
    10. Ksenia Yudaeva, 2002. "Globalization and Inequality in CIS Countries: Role of Institutions," Working Papers w0025, Center for Economic and Financial Research (CEFIR).

    More about this item

    Keywords

    social interactions; institutional lock-in; institutions; contractual failure; Wage arrears; Russia; transition;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • 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, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P23 - Economic Systems - - Socialist Systems and Transition Economies - - - Factor and Product Markets; Industry Studies; Population
    • P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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