More than a Penny's Worth: Left-Digit Bias and Firm Pricing

Strulov-Shlain, Avner

doi:10.2139/ssrn.3413019

Cited by 17 publications

(10 citation statements)

References 84 publications

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“…Behavioral economics has documented a wide variety of deviations from perfect rationality among consumers and workers. For example, in the product market, prices are more frequently observed to end in 99 cents than can be explained by chance, and a sizable literature has confirmed that this reflects firms taking advantage of customers' left digit bias (e.g Levy et al 2011;Strulov-Shlain 2019). However, it is typically assumed that deviations from firm optimization are unlikely to survive, as competition among firms drives firms that fail to maximize profits out of business.…”

Section: Introductionmentioning

confidence: 99%

Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers

Dubé

Manning

Naidu

2018

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and the 2018 Society of Labor Economists conference. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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Section: Introductionmentioning

confidence: 99%

Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers

Dubé

Manning

Naidu

2018

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“…One possible explanation for the clustering of wages at round numbers is that firms use round salaries as an optimal response to a worker bias. A plausible bias that has been documented in other environments is the left-digit bias, that is, the propensity of individuals to pay more attention to the first digit of a number relative to the other digits (Korvorst and Damian, 2008;Lacetera et al, 2012;Strulov-Shlain, 2022). I view the results in Section 4 as the main evidence against firms paying round-numbered wages as an optimal response to worker left-digit bias.…”

Section: F1 Worker Left-digit Biasmentioning

confidence: 89%

Coarse Wage-Setting and Behavioral Firms

Reyes¹

2022

Preprint

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This paper proposes coarse wage-setting as an explanation for why wages tend to cluster at round numbers. Using data on the contracted salaries of 280 million new hires from Brazil, I first establish that the distribution of salaries presents stark bunching at round numbers. In the data, more than a third of all workers are hired at a round-numbered salary. This finding is inconsistent with the wage distribution predicted by canonical wage-formation models. Reduced-form findings reveal that firms that tend to hire workers at round-numbered salaries are less sophisticated in observable characteristics (e.g., they are smaller and have less hiring experience) and, conditional on firm sophistication, experience worse outcomes (e.g., they have lower growth and survival rates). These firms also engage in nonstandard behavior in other settings (e.g., they are more likely to pay round-numbered wage increases). These facts are consistent with the bunching being driven by firm coarse wage-setting and inconsistent with firms optimally responding to a worker behavioral bias. Motivated by the reduced-form findings, I develop a wage-posting model in which optimization costs lead to the adoption of coarse wage-setting. The model delivers three predictions that I test and for which I find support using two research designs. This provides additional evidence for the coarse wage-setting hypothesis. Finally, I quantify some consequences of coarse wage-setting for relevant economic outcomes. Coarse wagesetting generates within-firm wage compression, increases nominal wage stickiness, and interacts with policies that affect the wage distribution, such as changes in the minimum wage.

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“…Prices often end in .99, since people seem to perceive differently the difference between $19.99 and $20 and the difference between $19.98 and $19.99. We refer to (Strulov-Shlain, 2019) for some recent work on and an overview of this well-researched topic.…”

Section: Language-based Preferencesmentioning

confidence: 99%

From outcome-based to language-based preferences

Capraro¹,

Halpern²,

Perc³

2022

Preprint

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We review the literature on models that try to explain human behavior in social interactions described by normal-form games with monetary payoffs. We start by covering social and moral preferences. We then focus on the growing body of research showing that people react to the language in which actions are described, especially when it activates moral concerns. We conclude by arguing that behavioral economics is in the midst of a paradigm shift towards language-based preferences, which will require an exploration of new models and experimental setups.

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More than a Penny's Worth: Left-Digit Bias and Firm Pricing

Cited by 17 publications

References 84 publications

Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers

Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers

Coarse Wage-Setting and Behavioral Firms

From outcome-based to language-based preferences

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