Marco Fongoni

I'm an applied theorist with research interests at the intersection of behavioural economics, the microeconomics of employment relationships, and the macroeconomic theory of wages and unemployment.

My research falls within the following areas:

Incomplete employment contracts, efficiency wages, and fairness and reciprocity in labour relations;
Macroeconomic implications of the resulting asymmetry and irreversibility in wage adjustments for unemployment;
Aspirations as reference points (applied to education, production, and job search).

WORKING PAPERS

Costly Wage Cuts, Relative Wage Comparisons, and Unemployment Hysteresis

preliminary draft available upon request (November 2025)

This paper advances a theory of unemployment hysteresis---temporary shocks leave permanent effects---based on a model of endogenous path-dependent wage rigidity under incomplete employment contracts. Workers' relative wage comparisons---incumbents' aversion to wage cuts and new hires' concern with pay inequality---imply wage increases are partially irreversible, generating path dependence and asymmetry in wage adjustments. During recessions, hiring wages fail to adjust fully downward, depressing job creation and producing large unemployment fluctuations and hysteresis effects. A quantitative assessment shows that these effects can be significant under a plausible set of calibrations of the parameters governing the cost of wage cuts and sensitivity of workers to relative wages. The paper concludes by discussing the implications of this theory for path-dependent nominal wage rigidities and for the effectiveness of monetary policy in mitigating hysteresis effects, suggesting promising directions for future research.

Aspirations as Reference points (with A. Dickson)

preliminary draft available upon request (June 2024)

Abstract: We develop a model of individual effort choice towards the achievement of an outcome, where the individual compares realised outcomes in relation to an aspiration reference point. We provide sufficient conditions for the dual nature of aspirations: moderate aspirations can motivate, but excessively high aspirations can discourage; and for the existence of states in which aspirations are fulfilled. We then study how this non-monotonic relationship between aspirations and effort interact in a dynamic environment when aspirations are endogenous to the individual's realised outcomes in the past. We show how behavioural traits such as aversion to failure and perseverance can crucially affect an individual's achievements along the equilibrium path, providing a novel perspective on the dual effect of aspirations on economic behaviour: holding excessively high aspirations can be frustrating, but can also lead to generating strictly better outcomes when individuals particularly dislike failure and are perseverant in the pursuit of their goals.

Income Inequality and Peer Effects in Education (with J. Norris, A. Romiti. and Z. Shi)

IZA Discussion Paper No. 15785 (Dec. 2022)

Absract: We study the long-run effects of income inequality within adolescent peer compositions in schools. We propose a theoretical framework based on reference dependence where inequality in peer groups can generate aspiration gaps. Guided by predictions from this framework we find that an increase in the share of low income peers within school-cohorts improves the educational outcomes of low income students and has negative effects on high income students. We further document a range of evidence that corroborates these results, including that they are distinct from peer non-linear ability effects. We then find that social cohesion, through better connections in the school network, has an important role in mitigating the effects of peer inequality. Our results provide evidence on the role of inequality in peer groups for long-run educational outcomes, while also demonstrating that there is potential to avoid these consequences.

Social Comparison, Wage Inequality and Procedural Fairness: an Experimental Investigation (with J. Hepp, and S.R. Waltl)

Preliminary and incomplete version (AIEL Conference , July 2019)

Abstract: This paper provides new laboratory evidence on the interplay between social comparison, procedural fairness and employees' morale and effort. We propose a new design which enables us to: i) isolate the effect of wage inequality on effort from other confounding factors that are present in previous experiments, such as piece-rate incentives or gift-exchange; ii) understand the mediating role of procedural fairness, that is, whether wage inequality based on merit is considered to be more acceptable by employees. We find that employees respond more strongly to disadvantageous wage inequality by decreasing their effort relative to their high-paid peers, and that the strength of this response is correlated with loss aversion. However, we also find that if wage inequality is the outcome of \emph{ex ante} differences in employees' ability (i.e. it is justified), its effect on morale and effort disappear. We conclude that transparency and fair procedures can help mediate the adverse effect of wage inequality in the workplace.

A Theoretical Note on: Asymmetries in Intensity and Persistence of Reciprocity in Labour Markets

Strathclyde Discussion Papers in Economics No.1815 (September 2018)

Abstract: This paper presents a model that can account for, and explain, two well documented empirical asymmetries characterising a worker’s reciprocity: negative reciprocity is both stronger, and more persistent, than positive reciprocity. The stronger intensity of negative reciprocity is driven by the worker being loss averse; the longer persistence is driven by the slower adaptation of the worker to wage changes that are perceived as unfair.

PUBLICATIONS

Why Wages Don't Fall in Jobs with Incomplete Contracts (with D. Schaefer and C. Singleton) - Management Science, 71(8):6319-6339.

Abstract: We investigate how the incompleteness of an employment contract---discretionary and non-contractible effort---can affect an employer’s decision about cutting nominal wages. Using matched employer-employee payroll data from Great Britain, linked to a survey of managers, we find support for the main predictions of a stylised theoretical framework of wage determination: nominal cuts are at most half as likely when managers believe their employees have significant discretion over how they do their work, though the involvement of employees, via information sharing, reduces this correlation. We also describe how contract incompleteness and wage cuts vary across different jobs. These findings provide the first observational quantitative evidence that managerial beliefs about contractual incompleteness can account for their hesitancy over nominal wage cuts. This has long been conjectured by economists based on anecdotes, qualitative surveys, and laboratory and field experiments.

Asymmetric Reciprocity and the Cyclical Behaviour of Wages, Effort, and Job Creation - American Economic Journal: Macroeconomics, 16(3): 52-89.

Published Version (July 2024)
Accepted Version (November 2023)
NEW: with quantitative assessment (July 2020)
2019 Sir Alec Cairncross Prize for best paper by a junior economist (runner-up).
Strathclyde Discussion Papers in Economics No.1809 (July 2018)
RES Conference (March 2018)

Abstract: This paper develops a search and matching framework in which workers are characterised by asymmetric reference-dependent reciprocity, and firms set wages by considering the effect that these can have on workers’ effort, and therefore on output. The cyclical response of effort to wage changes can considerably amplify shocks, independently of the cyclicality of the hiring wage, which becomes irrelevant for unemployment volatility; and firms’ expectations of downward wage rigidity in existing jobs increases the volatility of job creation. The model is consistent with evidence on hiring and incumbents’ wage cyclicality, and provides novel predictions on the dynamics of effort.

Does Pay Inequality Affect Worker Effort? An Assessment of Experimental Designs and Evidence - Journal of Economic Behavior & Organization, 220 (April 2024) p.697–716 .

Published Version (2024)
AMSE Working Paper No. 2022-30 (November 2022)
Preliminary version (March 2021)

Abstract: This paper develops a theoretical framework to think about employees' effort choices, and applies this framework to assess the ability of existing experimental designs to identify the effect of pay inequality on worker effort. The analysis shows that failure to control for a number of confounds---such as reciprocity towards the employer in multi-lateral gift-exchange games (vertical fairness), or the incentive to increase effort when feeling underpaid under piece rates (income targeting)---may lead to inaccurate interpretation of evidence of treatment effects. In light of these findings, the paper provides a set of recommendations on how to improve identification in the design of controlled experiments in the future.

Forward to the Past: Short-Term Effects of the Rent Freeze in Berlin (with Hahn, Anja M. and Kholodilin, Konstantin A. and Waltl, Sofie R.) - Management Science, 70(3). p.1901-1923.

Absract: In 2020, Berlin introduced a rigorous rent-control policy responding to soaring rents by setting a cap on rental prices: the Mietendeckel (rent freeze). The policy was revoked one year later by the German Constitutional Court. Although successful in reducing rents during its duration, the consequences for Berlin’s rental market and adjacent municipalities are not clear. In this paper we evaluate the short-term causal effect of the rent freeze on the supply-side of the market, both in terms of prices and quantities. We develop a theoretical framework capturing the key features of the rent freeze, and test its predictions using a rich pool of detailed rent adverts. In addition, we estimate hedonic-style Difference-in-Differences and Spatial Regression Discontinuity models comparing price trajectories of dwellings inside and outside the policy's scope. Advertised rents drop significantly upon the policy's enactment. A substantial rent gap across the administrative border emerges, with rapidly growing rents for Berlin's (unregulated) adjacent municipalities. Moreover, we document a significant drop in the number of advertised properties for rent, a share of which appears to be permanently lost for the rental sector.

Asymmetric Reference-dependent Reciprocity, Downward Wage Rigidity, and the Employment Contract (with Alex Dickson) - Journal of Economic Behavior & Organization, 163 (July 2019), p.409--429.

Abstract: We develop a model of asymmetric reciprocity and optimal wage setting based on contractual incompleteness, fairness, and reference dependence and loss aversion in the evaluation of wages by workers. The model establishes a positive wage-effort relationship capturing a worker's `asymmetric reference-dependent reciprocity', in which loss aversion implies negative reciprocity is stronger than positive reciprocity. Our theory provides an explanation for the observed asymmetry and dynamics of workers' reciprocity and establishes a micro-foundation for downward wage rigidity, the implications of which shed new light on a forward-looking firm's optimal wage setting and hiring decisions.

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