Gift Exchange in a Multi-worker Firm

Abstract

One of the main findings of a large body of gift exchange experiments is that in an incomplete contracts environment workers on average do not shirk and usually provide more than the minimum enforceable effort level. In general, 40 to 60 percent of the workers reward higher wages with higher effort. These results are observed for simple one-employer − one-worker relationships. In this paper we investigate whether they generalize to the more realistic situation in which the employer employs several workers. We compare a bilateral gift exchange game with a treatment in which each employer has four workers. We find that effort levels in the latter treatment are only marginally lower. Gift exchange thus appears to be robust to increases in the size of the workforce and intention-based reciprocity rather than social preferences seems to be the main driving force behind gift exchange. 1 We thank Hessel Oosterbeek for his help in designing this study and Robert Dur and Arno Riedl for valuable comments. An earlier version of this paper was presented at the ESA 2004 conference in Amsterdam. 2 IntroductionThe main objection mainstream economists typically raise against laboratory experiments is their (supposed) lack of external validity: To what extent can the results of such experiments be generalized to more complex real world phenomena?One of the major criticisms concerns the artificiality and simplicity of the conditions and relations created in the laboratory, which do not prevail, and are also not representative of those in reality (cf. Loewenstein, 1999, Schram, 2003.Experimentalists typically defend and motivate their simplified design by referring to the economic theory to which the experiment relates. Any theoretical model necessarily has to simplify matters by leaving out many elements of reality and has to make simplifying assumptions about rationality, (homogeneity of) preferences, type of institutions etc. For practical reasons, the experimentalist who subsequently wants to test the model has to simplify even more and will typically focus only on what s/he considers to be the core elements of the model. In describing the design of the experiment the experimenter will argue that according to standard theory these simplifications are reasonable. The typical justification given is that "According to standard theory, it should not make a difference that…". But what if the experimental results point out that the behavior of subjects is not in line with standard theory? This may fire back and invalidate the experiment as (simplified) representation of the economic reality of the outside world.A case in point is Akerlof's (1982) theory of the labor market as a gift exchange and the experimental tests of this model (see e.g. Fehr et al., 1993;Fehr and Gächter, 2000, summarize a series of gift exchange experiments). In the gift exchange model employers pay non-minimal wages to workers, who in response choose higher than minimum effort levels. As in all models, reality is necessarily simplified. For example, ...

Communication and Trust in Principal-Team Relationships: Experimental Evidence

“…As such, our study is closely related to the widespread debate on the optimal degree of transparency in organizations, in particular with respect to pay secrecy (Charness and Kuhn 2007, Cabrales and Charness 2011, Greiner et al 2011, Nosenzo 2013, Lount and Wilk 2014. Furthermore, our results add an important piece to the picture of the effectiveness of gift exchange in complex, multi-agent employment relations (Maximiano et al 2007, Bartling and von Siemens 2011, Gächter et al 2012, 2013, Gose and Sadrieh 2014. While it seems to be generally possible to establish successful gift-exchange relationships, the necessary prerequisites of perceived fairness, kindness, and trust might turn out as fragile concepts that are apparently susceptible to small and seemingly irrelevant changes in the work environment.…”

A Theory of Fairness in Labour Markets

“…Akerlof and Yellen () argue that such social comparisons may explain jealousy between workers, wage compression within firms, wage secrecy norms, and the negative correlation between occupational skill and unemployment. While the most direct tests from laboratory experiments find little evidence that workers' behaviour is sensitive to how much other workers are paid (Charness and Kuhn, ; Maximiano et al ., ), field evidence indicates that such social comparisons influence job satisfaction and may affect turnover (Card et al ., ). Finally, if firms have some ability to shape their workers' reference transactions, then they would have an incentive to do so.…”

Gift Exchange and Workers' Fairness Concerns: When Equality Is Unfair

“…In recent years, a vast body of literature has stressed the importance of gift exchange for mitigating moral-hazard problems of incomplete contracts: since many agents repay a gift in the form of higher wages by providing higher efforts, effort can be elicited under incomplete contracts even in one-shot situations where no future gains can be expected (e.g., Akerlof 1982, Fehr et al 1997, Maximiano et al 2007). The potential of gift exchange as a contract enforcement device, however, is likely to depend on the institutions that shape the employment relation, above all the mode of payment.…”