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

Dickson, Alex and Fongoni, Marco (2018) Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract. Preprint / Working Paper. University of Strathclyde, Glasgow.

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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: https://orcid.org/0000-0001-9386-9036

Fongoni, Marco ORCID: https://orcid.org/0000-0001-7096-2107

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• Item metadata

  Item type:	Monograph(Preprint / Working Paper)
  ID code:	66621
  Dates:	Date Event 13 November 2018 Published
  Subjects:	Social Sciences > Economic Theory
  Department:	Strathclyde Business School > Economics
  Depositing user:	Pure Administrator
  Date deposited:	17 Jan 2019 15:10
  Last modified:	11 Nov 2024 16:04
  URI:	https://strathprints.strath.ac.uk/id/eprint/66621