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

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Dickson, Alex and Fongoni, Marco (2019) Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract. Journal of Economic Behaviour and Organization, 163. pp. 409-429. ISSN 0167-2681 (https://doi.org/10.1016/j.jebo.2019.05.006)

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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.

ORCID iDs

Dickson, Alex ORCID logoORCID: https://orcid.org/0000-0001-9386-9036 and Fongoni, Marco ORCID logoORCID: https://orcid.org/0000-0001-7096-2107;
CORE (COnnecting REpositories)