Cognitive Dissonance and the Overtaking Anomaly: Psychology in the Principal-Agent Relationship

Posted: 14 Aug 2010

See all articles by John Smith

John Smith

Rutgers University-Camden

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

Smith, John, Cognitive Dissonance and the Overtaking Anomaly: Psychology in the Principal-Agent Relationship (August 12, 2010). Journal of Socio-Economics, Vol. 38, No. 4, 2009, Available at SSRN: https://ssrn.com/abstract=1658037

John Smith (Contact Author)

Rutgers University-Camden ( email )

Department of Economics
311 N. 5th St., 421 Armitage Hall
Camden, NJ 08102
United States

HOME PAGE: http://www.JohnSmithEcon.com/

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