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Organizational Change and Reference-Dependent Preferences

Author

Listed:
  • Klaus Schmidt

    (LMU Munich)

  • Jonas von Wangenheim

    (University of Bonn)

Abstract

Reference-dependent preferences can explain several puzzling observations about organizational change. We introduce a dynamic model in which a loss-neutral firm bargains with loss-averse workers over organizational change and wages. We show that change is often stagnant or slow for long periods followed by a sudden boost in productivity during a crisis. Moreover, it accounts for the fact that different firms in the same industry often have significant productivity differences. The model also demonstrates the importance of expectation management even if all parties have rational expectations. Social preferences explain why it may be optimal to divide a firm into separate entities.

Suggested Citation

  • Klaus Schmidt & Jonas von Wangenheim, 2023. "Organizational Change and Reference-Dependent Preferences," Rationality and Competition Discussion Paper Series 430, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:430
    as

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    References listed on IDEAS

    as
    1. Servaas van Bilsen & Roger J. A. Laeven & Theo E. Nijman, 2020. "Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level," Management Science, INFORMS, vol. 66(9), pages 3927-3955, September.
    2. Heiko Karle & Heiner Schumacher, 2017. "Advertising and attachment: exploiting loss aversion through prepurchase information," RAND Journal of Economics, RAND Corporation, vol. 48(4), pages 927-948, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    organizational change; productivity; reference points; loss aversion; social preferences;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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