CONTRACT VIOLATIONS, NEIGHBORHOOD EFFECTS, AND WAGE ARREARS IN RUSSIA

John Earle () and Klara Sabirianova Peter ()

William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan Stephen M. Ross Business School

Abstract: We present a model of neighborhood effects in wage payment delays. Positive feedback arises because each employer’s arrears affect the late payment costs faced by other firms in the same local labor market, resulting in a strategic complementarity in the practice. The model is estimated on panel data for workers and firms in Russia, facilitating identification through the use of a rich set of covariates and fixed effects for employees, employers, and local labor markets. We also exploit a policy intervention affecting public sector workers that provides an instrumental variable to estimate the endogenous reaction in the non-public sector. Consistently across specifications, the estimated reaction function displays strongly positive neighborhood effects, and the estimates of four feedback loops – operating through worker quits, effort, strikes, and legal penalties – imply that costs of delays are attenuated by neighborhood arrears. We also study a nonlinear case exhibiting two stable equilibria: a “punctual payment equilibrium” and a “late payment equilibrium.” The estimates imply that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in our data.

Keywords: wage arrears; contract violation; neighborhood effect; social interactions; multiple equilibria; network externality; strategic complementarity; transition; Russia. (search for similar items in EconPapers)
JEL-codes: A12 B52 J30 K42 L14 O17 P31 P37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law, nep-net, nep-tra and nep-ure
Date: 2004-07-01
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Working Paper: Contract Violations, Neighborhood Effects, and Wage Arrears in Russia (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:wdi:papers:2004-708

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