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

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  • Dickson, Alex
  • Fongoni, Marco

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.

Suggested Citation

  • Dickson, Alex & Fongoni, Marco, 2019. "Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 409-429.
    • Handle: RePEc:eee:jeborg:v:163:y:2019:i:c:p:409-429
    DOI: 10.1016/j.jebo.2019.05.006
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    2. Grundmann, Susanna & Giamattei, Marcus & Graf Lambsdorff, Johann, 2020. "On the downward rigidity of wages: Evidence from an experimental labour market with monetary neutrality," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-80-20, University of Passau, Faculty of Business and Economics.
    3. Marco Fongoni & Daniel Schaefer & Carl Singleton, 2023. "Why wages don't fall in jobs with incomplete contracts," Economics Discussion Papers em-dp2023-12, Department of Economics, University of Reading.
    4. Thanos Mergoupis & Robertas Zubrickas, 2024. "Work experience, information revelation, and study effort," Oxford Economic Papers, Oxford University Press, vol. 76(2), pages 495-513.
    5. Jason Sandvik & Richard Saouma & Nathan Seegert & Christopher Stanton, 2021. "Employee Responses to Compensation Changes: Evidence from a Sales Firm," Management Science, INFORMS, vol. 67(12), pages 7687-7707, December.
    6. Zubrickas, Robertas, 2023. "The relative income effect and labor supply," Journal of Economic Behavior & Organization, Elsevier, vol. 209(C), pages 176-184.
    7. Jose Rojas-Fallas & J. Forrest Williams, 2020. "Wage Differences Matter: An Experiment of Social Comparison and Effort Provision when Wages Increase or Decrease," Games, MDPI, vol. 11(4), pages 1-12, December.
    8. Laszlo Goerke, 2020. "An Efficiency-Wage Model with Habit Concerns about Wages," CESifo Working Paper Series 8428, CESifo.
    9. Christian Koch, 2021. "Can reference points explain wage rigidity? Experimental evidence," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 55(1), pages 1-17, December.
    10. Kujansuu, Essi & Schram, Arthur, 2021. "Shocking gift exchange," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 783-810.
    11. Marco Fongoni & Daniel Schaefer & Carl Singleton, 2023. "When are wages cut? The roles of incomplete contracts and employee involvement," Working Papers hal-03953201, HAL.
    12. Daniel Schaefer & Carl Singleton, 2020. "Nominal Wage Adjustments and the Composition of Pay: New Evidence from Payroll Data," Economics Discussion Papers em-dp2020-01, Department of Economics, University of Reading.
    13. Fongoni, Marco, 2024. "Does pay inequality affect worker effort? An assessment of experimental designs and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 697-716.
    14. Laszlo Goerke, 2021. "Habit formation and wage determination," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(1), pages 61-76, January.
    15. Marco Fongoni, 2024. "Asymmetric Reciprocity and the Cyclical Behavior of Wages, Effort, and Job Creation," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(3), pages 52-89, July.
    16. Andrea Guido & Alejandro Martinez-Marquina & Ryan Rholes, 2022. "Reference Dependence and the Role of Information Frictions," GREDEG Working Papers 2022-17, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.

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    More about this item

    Keywords

    Reference dependence; Loss aversion; Asymmetric reciprocity; Downward wage rigidity;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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