Contract Violations, Neighborhood Effects, and Wage Arrears in Russia

57 Pages Posted: 20 Jul 2004

See all articles by John S. Earle

John S. Earle

George Mason University - Schar School of Policy and Government; IZA Institute of Labor Economics

Klara Sabirianova Peter

University of North Carolina - Chapel Hill; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 2004

Abstract

We present a model of neighborhood effects in wage payment delays. Positive feedback arises because each employer's arrears affect the late payment costs faced by other firms in the same local labor market, resulting in a strategic complementarity in the practice. The model is estimated on panel data for workers and firms in Russia, facilitating identification through the use of a rich set of covariates and fixed effects at the level of the employee, the employer, and the local labor market. We also exploit a policy intervention affecting public sector workers that provides an instrumental variable to estimate the endogenous reaction in the non-public sector. Consistently across specifications, the estimated reaction function displays strongly positive neighborhood effects, and the estimates of four feedback loops - operating through worker quits, effort, strikes, and legal penalties - imply that costs of delays are attenuated by neighborhood arrears. We also study a nonlinear case exhibiting two stable equilibria: a punctual payment equilibrium and a late payment equilibrium. The estimates imply that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in our data.

Keywords: Wage arrears, contract violation, neighborhood effect, social interactions, multiple equilibria, network externality, strategic complementarity, transition, Russia

JEL Classification: A12, B52, J30, K42, L14, O17, P31, P37

Suggested Citation

Earle, John S. and Sabirianova Peter, Klara, Contract Violations, Neighborhood Effects, and Wage Arrears in Russia (July 2004). Available at SSRN: https://ssrn.com/abstract=566101 or http://dx.doi.org/10.2139/ssrn.566101

John S. Earle

George Mason University - Schar School of Policy and Government ( email )

3351 Fairfax Drive
MS 3B1
Arlington, VA 22201
United States
703-993-8023 (Phone)

HOME PAGE: http://earle.gmu.edu

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Klara Sabirianova Peter (Contact Author)

University of North Carolina - Chapel Hill ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://www.unc.edu/~kpeter

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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