Adaptation Towards Reference Values: A Non-Linear Perspective
Posted: 15 Mar 2007 Last revised: 8 Jan 2012
Date Written: 2008
Using large-scale panel data, we examine the dynamics of adjustment towards reference points for key workplace attributes. We discover that an Exponential Smooth Transition Autoregressive (ESTAR) model is superior to a linear model in characterizing such a process. The speed of adjustment increases non-linearly with the distance from reference points and adjustment is faster for job satisfaction shocks compared to shocks in earnings or work hours. Our findings lend further credence to the relative utility hypothesis and highlight the inherently non-linear nature of the dynamic path of adjustment towards reference points, a previously neglected issue in the adaptation literature.
Keywords: Reference Points, Relative Utility, Adaptation, ESTAR Models, Job Satisfaction
JEL Classification: D60, I31, J60, C20
Suggested Citation: Suggested Citation