Publication: "Organizational Change and Reference-Dependent Preferences" "Organizational Change and Reference-Dependent Preferences"

Reference-dependent preferences can explain several puzzling observations about organizational change. We introduce a dynamic model in which a firm bargains with loss-averse workers about organizational change and wages. We show that change is often stagnant or slow for many periods, followed by a sudden boost in productivity triggered by a crisis. In a crisis, workers concede to organizational change but resist nominal wage reductions. In addition, the model explains why different firms in the same industry often have significant productivity differences. Finally, the model demonstrates the importance of expectations management even if all parties have rational expectations.