Organizational Change and Reference-Dependent Preferences

Schmidt and von Wangenheim develop a dynamic model of organizational change in which workers have reference-dependent preferences — specifically loss aversion and social comparisons — to explain several empirically observed patterns that standard models cannot easily account for: organizational inertia in normal times, sudden productivity jumps during crises, persistent total factor productivity (TFP) differences across firms in the same industry, and effort and wage compression within firms.

The motivating empirical puzzle is the early-1980s collapse of the Great Lakes iron ore and steel industry, which had been geographically shielded from foreign competition for over 100 years. When Brazilian competitors undercut prices, the industry responded by roughly doubling labor productivity within a few years — not through new technology or capital investment, but through organizational improvements and more efficient use of existing capital (Schmitz 2007). The broader puzzle is Syverson’s (2004) finding that at the four-digit industry level, the 90th-percentile firm has TFP 1.9 times that of the 10th-percentile firm, a gap that cannot be explained by observable input differences.

Klaus M Schmidt | Macro Paper Warehouse

Organizational Change and Reference-Dependent Preferences