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Cognitive dissonance and the overtaking anomaly: Psychology in the principal-agent relationship

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  • Smith, John

Abstract

We propose that the concept of cognitive dissonance contributes to the explanation of the regularity that wages grow faster than productivity. Cognitive dissonance is the tendency of a person to engage in self-justification after a decision. We show that a consequence of this tendency is that agents prefer increasing sequences of surplus over their career. This is achieved by paying wages less than productivity early in the career and more than productivity later. We refer to this as the overtaking anomaly. We distinguish the cognitive dissonance explanation from other explanations of the overtaking anomaly by identifying their divergent implications.

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  • Smith, John, 2009. "Cognitive dissonance and the overtaking anomaly: Psychology in the principal-agent relationship," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(4), pages 684-690, August.
    • Handle: RePEc:eee:soceco:v:38:y:2009:i:4:p:684-690
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    Cited by:

    1. Duffy, Sean & Smith, John, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Cambridge University Press, vol. 8(1), pages 74-90, January.
    2. repec:cup:judgdm:v:8:y:2013:i:1:p:74-90 is not listed on IDEAS
    3. Duffy, Sean & Smith, John, 2013. "Preference for increasing wages: How do people value various streams of income?," Judgment and Decision Making, Cambridge University Press, vol. 8(1), pages 74-90, January.
    4. Mark Bowden, 2015. "A model of information flows and confirmatory bias in financial markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 38(2), pages 197-215, October.
    5. Larry Epstein & Igor Kopylov, 2006. "Cognitive Dissonance and Choice," RCER Working Papers 525, University of Rochester - Center for Economic Research (RCER).
    6. Battisti, Michele, 2015. "Present-biased preferences and optimal compensation schedules: a note," MPRA Paper 64818, University Library of Munich, Germany.
    7. Duffy, Sean & Smith, John & Woods, Kristin, 2015. "How does the preference for increasing payments depend on the size and source of the payments?," MPRA Paper 64212, University Library of Munich, Germany.
    8. John Smith, 2007. "Cognitive Dissonance, Imperfect Memory and the Preference for Increasing Payments," Departmental Working Papers 200705, Rutgers University, Department of Economics.

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