A theory of wage setting behavior
Dickson, Alex and Fongoni, Marco (2016) A theory of wage setting behavior. Preprint / Working Paper. University of Strathclyde, Glasgow.
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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.
ORCID iDs
Dickson, Alex ORCID: https://orcid.org/0000-0001-9386-9036 and Fongoni, Marco ORCID: https://orcid.org/0000-0001-7096-2107;-
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Item type: Monograph(Preprint / Working Paper) ID code: 58458 Dates: DateEvent17 February 2016PublishedSubjects: Social Sciences > Finance Department: Strathclyde Business School > Economics Depositing user: Pure Administrator Date deposited: 03 Nov 2016 14:42 Last modified: 11 Nov 2024 16:03 Related URLs: URI: https://strathprints.strath.ac.uk/id/eprint/58458