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Reference-dependent preferences in the public and private sectors: A nonlinear perspective


  • Georgellis, Yannis
  • Gregoriou, Andros
  • Tsitsianis, Nikolaos


Although existing studies in the strategic management literature examine the importance of reference points in the context of managerial decisions vis-à-vis organizational performance, there is surprisingly little evidence on how reference earnings affect employees' wellbeing and behavior. The present study closes this gap by investigating adaptation dynamics towards reference earnings in the context of employees’ behavioral responses to social comparisons. We argue that a wedge between actual and aspiration-level earnings causes discontent that spurs employees into action to materialize their aspirations. The robustness of such action depends on the size of the wedge in a nonlinear fashion, a hypothesis supported by our findings. Nevertheless, heterogeneity in behavioral responses is evident across the public and private sectors and across gender and educational attainment. Such heterogeneity could be partially attributed to differences in public service motivation among public and private sector employees, to the different weights that employees place on pecuniary vs. non-pecuniary rewards, and whether reference earnings are likely to trigger behavioral responses through a 'jealousy' or through an 'ambition' channel. These findings have implications for the design of strategic human resource management policies to establish reward structures encouraging employees to adopt risk attitudes that are consistent with an overall business strategic plan.

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  • Georgellis, Yannis & Gregoriou, Andros & Tsitsianis, Nikolaos, 2009. "Reference-dependent preferences in the public and private sectors: A nonlinear perspective," MPRA Paper 17021, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17021

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    References listed on IDEAS

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    More about this item


    adaptation; reference earnings; comparison income; reference-dependent preferences; ESTAR models;

    JEL classification:

    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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