Organizational Change and Reference-Dependent Preferences

Schmidt, Klaus M. and Wangenheim, Jonas von (4. October 2023): Organizational Change and Reference-Dependent Preferences. Collaborative Research Center Transregio 190, Discussion Paper No. 430

Abstract

Reference-dependent preferences can explain several puzzling observations about organizational change. We introduce a dynamic model in which a loss-neutral firm bargains with loss-averse workers over organizational change and wages. We show that change is often stagnant or slow for long periods followed by a sudden boost in productivity during a crisis. Moreover, it accounts for the fact that different firms in the same industry often have significant productivity differences. The model also demonstrates the importance of expectation management even if all parties have rational expectations. Social preferences explain why it may be optimal to divide a firm into separate entities.

• Item Type: Paper
• Keywords: organizational change; productivity; reference points; loss aversion; social preferences
• Faculties: Economics > Collaborative Research Center Transregio "Rationality and Competition"
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D23, D91, L2
• Language: English
• DFG: Gefördert durch die Deutsche Forschungsgemeinschaft (DFG) - 280092119