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Reference Dependence and the Role of Information Frictions

Author

Listed:
  • Andrea Guido

    (Burgundy School of Business)

  • Alejandro Martinez-Marquina

    (Klarman Fellow, Cornell University)

  • Ryan Rholes

    (University of Oxford)

Abstract

Decades of research highlight the importance of social preferences in strategic interactions. However, most studies assume full information and stable conditions. We relax both by introducing endowment shocks and information frictions into a labor market experiment. Workers evaluate wages relative to a reference wage that depends on economic conditions and adjusts instantaneously to information, but sluggishly and asymmetrically to experience. Firms form accurate beliefs about how shocks and information reshape effort responses and act on their beliefs. We find self-interest and reference dependence rationalize behavior previously attributed to other-regarding preferences. Counter-intuitively, information frictions do not always benefit the informed party.

Suggested Citation

  • 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.
    • Handle: RePEc:gre:wpaper:2022-17
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    References listed on IDEAS

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    More about this item

    Keywords

    reference dependence; information frictions; beliefs; wage rigidity; labor market; business cycle;
    All these keywords.

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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