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

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Author Info
Johannes Abeler () (University of Bonn)
Stefen Altmann () (IZA Bonn)
Sebastian Kube () (Max Planck Institute for Research on Collective Goods)
Matthias Wibral () (University of Bonn)

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Abstract

We study how different payment modes inuence the effectiveness of gift exchange as a contract enforcement device. In particular, we analyze how horizontal fairness concerns affect performance and efficiency in an environment characterized by contractual incompleteness. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. We find that the use of equal wages elicits substantially lower efforts. This is not caused by monetary incentives per se since under both wage schemes it is profit-maximizing for agents to exert high efforts. The treatment difference instead seems to be driven by the fact that the norm of equity is violated far more frequently in the equal wage treatment. After having suffered from violations of the equity principle, agents withdraw effort. These findings hold even after controlling for the role of intentions, as we show in a third treatment. Our results suggest that adherence to the norm of equity is a necessary prerequisite for successful establishment of gift-exchange relations.

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Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2009-11.

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Date of creation: Jun 2009
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Handle: RePEc:cdx:dpaper:2009-11

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Related research
Keywords: wage setting; wage equality; equity; gift exchange; reciprocity; incomplete contracts;

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Find related papers by JEL classification:
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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