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

Alex Dickson and Marco Fongoni ()
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Alex Dickson: University of Strathclyde [Glasgow]
Marco Fongoni: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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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)
Date: 2019-07
Note: View the original document on HAL open archive server: https://hal.science/hal-05547603v1
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Published in Journal of Economic Behavior and Organization, 2019, 163, pp.409 - 429. ⟨10.1016/j.jebo.2019.05.006⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05547603

DOI: 10.1016/j.jebo.2019.05.006

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