We present a new theory of wage adjustment, based on worker loss aversion. In line with prospect theory, the workers' perceived utility losses from wage decreases are weighted more heavily than the perceived utility gains from wage increases of equal magnitude. Wage changes are evaluated...

We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their...

We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price...

In response to the Covid-19 pandemic, governments around the world have provided a massive fiscal and monetary stimulus. While this policy is welcome in the short run, it does not address the underlying problem in the medium and long run. The reason is that the pandemic has not given rise to a...

This paper examines the reflexive interplay between individual decisions and social forces to analyze the evolution of cooperation in the presence of "multi-directedness," whereby people's preferences depend on their psychological motives. People have access to multiple, discrete motives....

This paper seeks to extend the domain of identity economics by exploring motivational foundations of in-group cooperation and out-group competition. On this basis, we explore the reflexive interaction between individual economic decisions and social identities in response to technological change...

This paper presents a reappraisal of unemployment movements in the European Union. Our analysis is based on the chain reaction theory of unemployment, which focuses on (a) the interaction among labor market adjustment processes, (b) the interplay between these adjustment processes and the...

This paper examines how skill-biased growth can generate economic fragmentation (income disparities) that give rise to social fragmentation (the adoption of increasingly incompatible social identities and values), which generate political fragmentation (the adoption of increasingly incompatible...

This paper explores a new theoretical and empirical approach to the assessment of human wellbeing, relevant to current challenges of social fragmentation in the presence of globalization and technological advance. We present two indexes of well-being - solidarity (S) and agency (A) - to be...

In this paper we propose a novel way to model the labor market in the context of a New-Keynesian general equilibrium model, incorporating labor market frictions in the form of hiring and firing costs. We show that such a model is able to replicate many important stylized facts of the business...