Working Paper: CEPR ID: DP8997
Authors: Kfir Eliaz; Rani Spiegler
Abstract: We incorporate reference-dependent preferences into a search-and-matching model of the labor market, in which firms have all the bargaining power and productivity follows an AR(1) process. Motivated by Akerlof (1982) and Bewley (1999), we assume that existing workers are willing to exert unobserved,
Keywords: negative reciprocity; reference dependence; search and matching; Shimer puzzle; social preferences; wage rigidity
JEL Codes: C72; D03; E24; E32; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reference-dependent preferences (D11) | wage rigidity (J31) |
| lagged expected wages (J39) | downward wage rigidity (J31) |
| productivity decrease (O49) | reluctance to cut wages for existing workers (J39) |
| reluctance to cut wages for existing workers (J39) | damage to morale (H84) |
| damage to morale (H84) | reduce output (Y60) |
| newly hired workers (J63) | more flexible wages (J39) |
| market tightness (R31) | more volatile under reference dependence (D11) |
| past productivity shocks (O49) | sensitive dynamics of hiring and retention (M51) |