Cognitive dissonance and the overtaking anomaly: Psychology in the principal-agent relationship

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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.

Original languageEnglish (US)
Pages (from-to)684-690
Number of pages7
JournalJournal of Socio-Economics
Volume38
Issue number4
DOIs
StatePublished - Aug 2009

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Behavioral economics
  • Cognitive dissonance
  • Increasing wages
  • Overtaking anomaly

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