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Laboratory Bilateral Gift Exchange: The Impact of Loss Aversion

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  • Dennis A.V. Dittrich
  • Anthony Ziegelmeyer

    ()

Abstract

We present a systematic robustness test of the persistence of gift-exchanges in the laboratory. Our data clearly establish that the effect of social forces is dramatically crowded out by loss aversion. This was not observed before, as in other studies that allow for nominal losses participants were endowed with a substantial lump sum payment. We did not endow our participants with some initial wealth (they also got no show-up fee). Instead, participants were required to sign an agreement before the start of the experimental session in which they agreed to cover losses by either incomes from future participation in experimental sessions or by their own money. We conjecture that by providing some initial endowment to their participants, previous experimental studies have clearly failed to investigate the impact of losses on the level of gift exchange reported. Further, we observe a considerable between treatment variability in the effort-wage relation. Small lump-sum payments to the first-mover reduce the effort-wage slope significantly. A reduction in the profitability of effort increases the effort-wage slope.

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Bibliographic Info

Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2005-34.

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Length: 17 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:esi:discus:2005-34

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  1. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, David K. Levine.
  2. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  3. R. Lynn Hannan & John H. Kagel & Donald V. Moser, 2002. "Partial Gift Exchange in an Experimental Labor Market: Impact of Subject Population Differences, Productivity Differences, and Effort Requests on Behavior," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 923-951, October.
  4. Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2007. "Gift Exchange in a Multi-Worker Firm," Economic Journal, Royal Economic Society, vol. 117(522), pages 1025-1050, 07.
  5. Charness, Gary & Frechette, Guillaume R & Kagel, John H, 2002. "How Robust is Laboratory Gift Exchange?," University of California at Santa Barbara, Economics Working Paper Series qt8qq4k3ph, Department of Economics, UC Santa Barbara.
  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  8. Arkes, Hal R. & Joyner, Cynthia A. & Pezzo, Mark V. & Nash, Jane Gradwohl & Siegel-Jacobs, Karen & Stone, Eric, 1994. "The Psychology of Windfall Gains," Organizational Behavior and Human Decision Processes, Elsevier, vol. 59(3), pages 331-347, September.
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