Abstract
| Language | English |
|---|---|
| Place of Publication | Glasgow |
| Publisher | University of Strathclyde |
| Pages | 1-55 |
| Number of pages | 55 |
| Volume | 15-05 |
| Publication status | Published - 17 Feb 2016 |
Publication series
| Name | Strathclyde discussion papers in economics |
|---|
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Keywords
- reference dependence
- loss aversion
- reciprocity
- morale
- downward wage rigidity
Cite this
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A theory of wage setting behavior. / Dickson, Alex; Fongoni, Marco.
Glasgow : University of Strathclyde, 2016. p. 1-55 (Strathclyde discussion papers in economics).Research output: Working paper
TY - UNPB
T1 - A theory of wage setting behavior
AU - Dickson, Alex
AU - Fongoni, Marco
PY - 2016/2/17
Y1 - 2016/2/17
N2 - In this paper we provide a micro-foundation for wage rigidity in a simple and tractable model of wage setting behavior, inspired by a synthesis of recent convergent insights from anthropological and experimental research, and drawing on concepts advanced in the behavioral economics literature. The core principles underlying our theory are contractual incompleteness, fairness, reciprocity, and reference dependence and loss aversion in the evaluation of wage contracts by workers. The model establishes a wage effort relationship that captures a worker's asymmetric reference-dependent reciprocity, in which loss aversion implies effort responds more strongly to wage changes below the reference wage than above it. This basic relationship gives rise to wage rigidity around a worker's reference wage. We explore these implications further in a simple dynamic stochastic environment in which a worker adapts their feelings of entitlement once they become employed. The model allows us to shed new light on the importance of anticipated negative reciprocity and the cost of wage rigidity for a far sighted firm's hiring and wage setting behavior.
AB - In this paper we provide a micro-foundation for wage rigidity in a simple and tractable model of wage setting behavior, inspired by a synthesis of recent convergent insights from anthropological and experimental research, and drawing on concepts advanced in the behavioral economics literature. The core principles underlying our theory are contractual incompleteness, fairness, reciprocity, and reference dependence and loss aversion in the evaluation of wage contracts by workers. The model establishes a wage effort relationship that captures a worker's asymmetric reference-dependent reciprocity, in which loss aversion implies effort responds more strongly to wage changes below the reference wage than above it. This basic relationship gives rise to wage rigidity around a worker's reference wage. We explore these implications further in a simple dynamic stochastic environment in which a worker adapts their feelings of entitlement once they become employed. The model allows us to shed new light on the importance of anticipated negative reciprocity and the cost of wage rigidity for a far sighted firm's hiring and wage setting behavior.
KW - reference dependence
KW - loss aversion
KW - reciprocity
KW - morale
KW - downward wage rigidity
M3 - Working paper
VL - 15-05
T3 - Strathclyde discussion papers in economics
SP - 1
EP - 55
BT - A theory of wage setting behavior
PB - University of Strathclyde
CY - Glasgow
ER -