Equilibrium Wage Arrears: A Theoretical and Empirical Analysis of Institutional Lock-In

53 Pages Posted: 10 Dec 2000

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: September 2000

Abstract

We present a model of wage contract violation that implies a possibility of multiple equilibria in the level of arrears. Positive feedback arises because each employer's arrears affect the costs of late payment faced by other employers operating in the same labor market, resulting in a network externality or strategic complementarity in the adoption of the practice. We study the case of three equilibria, distinguishing two that are stable: the "punctual payment equilibrium" and the "late payment equilibrium." Our econometric analysis of linked employer-employee data for Russia supports the model's contention that the firm's costs of wage arrears ? as embodied in worker effort, quit and strike behavior, and the probability of legal penalties ? are attenuated by arrears in the local labor market. We estimate the arrears reaction function implied by the model, showing that it exhibits strongly positive feedback, and that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in 1995 and 1998. Simulation results imply a late payment equilibrium characterized by six monthly overdue wages for a typical worker in 1995 and nine in 1998.

Keywords: Wage arrears, contractual failure, institutions, institutional lock-in, social interactions, Russia, transition

JEL Classification: J30, J33, K42, L14, O17, P23, P31

Suggested Citation

Earle, John S. and Sabirianova Peter, Klara, Equilibrium Wage Arrears: A Theoretical and Empirical Analysis of Institutional Lock-In (September 2000). Available at SSRN: https://ssrn.com/abstract=251999 or http://dx.doi.org/10.2139/ssrn.251999

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)

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
171
Abstract Views
2,681
Rank
315,980
PlumX Metrics