A Theory of Wage Setting Behaviour

Fongoni, Marco and Dickson, Alex (2016) A Theory of Wage Setting Behaviour. Preprint / Working Paper. University of Strathclyde, Glasgow.

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Abstract

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 farsighted firm’s hiring and wage setting behavior.

  • Item type:Monograph(Preprint / Working Paper)
    ID code:68327
    Dates:
    Date
    Event
    17 February 2016
    Published
    Notes:Published as a paper within the Discussion Papers in Economics, No. 15-05 (2016). This version of the paper is an update on the original version made available in July 2015 (which is available from the authors upon request).
    Subjects:Social Sciences > Economic Theory
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:11 Jun 2019 08:45
    Last modified:11 Apr 2024 02:54
    URI:https://strathprints.strath.ac.uk/id/eprint/68327
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