Organizational Change and Reference-Dependent Preferences

Klaus Schmidt and Jonas von Wangenheim
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Klaus Schmidt: LMU Munich
Jonas von Wangenheim: University of Bonn

No 430, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Reference-dependent preferences can explain several puzzling observations about organizational change. We introduce a dynamic model in which a loss-neutral firm bargains with loss-averse workers over organizational change and wages. We show that change is often stagnant or slow for long periods followed by a sudden boost in productivity during a crisis. Moreover, it accounts for the fact that different firms in the same industry often have significant productivity differences. The model also demonstrates the importance of expectation management even if all parties have rational expectations. Social preferences explain why it may be optimal to divide a firm into separate entities.

Keywords: organizational change; productivity; reference points; loss aversion; social preferences (search for similar items in EconPapers)
JEL-codes: D23 D91 L2 (search for similar items in EconPapers)
Date: 2023-10-04
New Economics Papers: this item is included in nep-hrm, nep-mic and nep-upt
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