Cognitive Dissonance and the Overtaking Anomaly: Psychology in the Principal-Agent Relationship
Posted: 14 Aug 2010
Date Written: August 12, 2010
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.
Keywords: Increasing wages, Cognitive dissonance, Overtaking anomaly, Behavioral economics
JEL Classification: D86, J31, M52
Suggested Citation: Suggested Citation