Complementarity and Custom in Wage Contract Violation

Upjohn Institute Staff Working Paper 06-129

49 Pages Posted: 24 Jul 2006  

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: April 1, 2008

Abstract

We analyze a model of wage delay in which strategic complementarity arises because each employer's costs of violating its contracts decrease with the arrears in its labor market. The model is estimated on panel data for workers and firms in Russia, facilitating identification through fixed effects for employees, employers, and local labor markets, and instrumental variables based on policy interventions. The estimated reaction function displays strongly positive neighborhood effects, and the estimated feedback loops - worker quits, effort, strikes, and legal penalties - imply that costs of wage delays are attenuated by neighborhood arrears. We also study a nonlinear case with two stable equilibria: a punctual payment and a late payment equilibrium. The estimates imply that the theoretical conditions for multiple equilibria under symmetric labor market competition are satisfied in our data.

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

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

Suggested Citation

Earle, John S. and Sabirianova Peter, Klara, Complementarity and Custom in Wage Contract Violation (April 1, 2008). Upjohn Institute Staff Working Paper 06-129. Available at SSRN: https://ssrn.com/abstract=918262 or http://dx.doi.org/10.2139/ssrn.918262

John S. Earle (Contact Author)

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

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)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paper statistics

Downloads
69
Rank
274,712
Abstract Views
931