Equilibrium Wage Arrears: A Theoretical and Empirical Analysis of Institutional Lock-In

John Earle and Klara Sabirianova Peter ()

No 196, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We present a model of wage contract violation that implies a possibility of multiple equilibria in the level of arrears. Positive feedback arises because each employer’s arrears affect the costs of late payment faced by other employers operating in the same labor market, resulting in a network externality or strategic complementarity in the adoption of the practice. We study the case of three equilibria, distinguishing two that are stable: the "punctual payment equilibrium" and the "late payment equilibrium." Our econometric analysis of linked employer-employee data for Russia supports the model’s contention that the firm’s costs of wage arrears - as embodied in worker effort, quit and strike behavior, and the probability of legal penalties - are attenuated by arrears in the local labor market. We estimate the arrears reaction function implied by the model, showing that it exhibits strongly positive feedback, and that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in 1995 and 1998. Simulation results imply a late payment equilibrium characterized by six monthly overdue wages for a typical worker in 1995 and nine in 1998.

Keywords: social interactions; institutional lock-in; institutions; contractual failure; Wage arrears; Russia; transition (search for similar items in EconPapers)
JEL-codes: J30 J33 K42 L14 O17 P23 P31 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2000-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Published - revised version published as' Complementarity and Custom in Wage Contract Violation' in: Review of Economicss and Statistics, 2009, 91 (4), 832 - 849

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