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Coarse Wage-Setting and Behavioral Firms

Germ\'an Reyes

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Abstract: This paper shows that the bunching of wages at round numbers is partly driven by firm coarse wage-setting. Using data on 280 million new hires from Brazil, I first establish that salaries tend to cluster at round numbers. Then, I show that firms that tend to hire workers at round-numbered salaries are less sophisticated and have worse market outcomes. Next, I develop a wage-posting model in which optimization costs lead to the adoption of coarse rounded wages and provide evidence supporting three model predictions using two research designs. Finally, I examine some consequences of coarse wage-setting for relevant economic outcomes.

Date: 2022-06, Revised 2022-12
New Economics Papers: this item is included in nep-dem
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Handle: RePEc:arx:papers:2206.01114