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

Alex Dickson and Marco Fongoni

Journal of Economic Behavior & Organization, 2019, vol. 163, issue C, 409-429

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.

Keywords: Reference dependence; Loss aversion; Asymmetric reciprocity; Downward wage rigidity (search for similar items in EconPapers)
JEL-codes: D91 E70 J30 J41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:163:y:2019:i:c:p:409-429

DOI: 10.1016/j.jebo.2019.05.006

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