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Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence

Christian Grund and Dirk Sliwka
Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für die gesamte Staatswissenschaft
Vol. 163, No. 2 (June 2007), pp. 313-335
Stable URL: http://www.jstor.org/stable/40752645
Page Count: 23
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence
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Abstract

We study the impact of wage increases on job satisfaction theoretically and empirically. To do this, we apply a utility function that rises with the absolute wage level as well as with wage increases. We show that when employees can influence their wages by exerting effort, myopic utility maximization directly implies increasing and concave wage profiles. Furthermore, employees become unhappier over time if they remain in the same job, even though wages increase. Using data from 19 waves of the German Socio-Economic Panel, we find empirical support for both the form of the utility function and the decreasing job satisfaction patterns.

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