Reference dependence and the role of information frictions

We introduce positive and negative endowment shocks and information frictions into an experimental labor market and study how firms share these with workers. Workers evaluate wages consistently with a reference wage, demanding higher (lower) wages but exerting the same effort when a positive (negative) shock is common knowledge. Their wage expectations adjust instantaneously to new information but sluggishly and asymmetrically when unaware of the shock. Firms form accurate beliefs about how shocks and information reshape effort responses and act on their beliefs, almost optimally in all scenarios. Our results suggest a limited role for other-regarding preferences and can be rationalized by a selfish firm best responding to a worker evaluating wages according to a reference wage.