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Reciprocity and Payment Schemes: When Equality Is Unfair

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Author Info

  • Abeler, Johannes

    ()
    (IZA Bonn and University of Bonn)

  • Altmann, Steffen

    ()
    (IZA Bonn and University of Bonn)

  • Kube, Sebastian

    ()
    (University of Karlsruhe)

  • Wibral, Matthias

    ()
    (IZA Bonn and University of Bonn)

Abstract

A growing literature stresses the importance of reciprocity, especially for employment relations. In this paper, we study the interaction of different payment modes with reciprocity. In particular,we analyze how equal wages affect performance and effciency 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 and effciency. 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 is rather driven by the fact that reciprocity is violated far more frequently in the equal wage treatment. Agents suffering from a violation of reciprocity subsequently withdraw effort. Our results suggest that individual reward and punishment opportunities are crucial for making reciprocity a powerful contract enforcement device.

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Bibliographic Info

Paper provided by The Ratio Institute in its series Ratio Working Papers with number 109.

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Length: 25 pages
Date of creation: 04 Dec 2006
Date of revision:
Handle: RePEc:hhs:ratioi:0109

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Keywords: laboratory experiment; wage setting; wage equality; gift exchange; reciprocity; social norms; incomplete contracts; multiple agents;

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Cited by:
  1. Simon Gaechter & Daniele Nosenzo & Martin Sefton, 2008. "The Impact of Social Comparisons on Reciprocity," Discussion Papers 2008-09, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  2. Gary Charness & Ramón Cobo-Reyes & Natalia Jiménez & Juan Antonio Lacomba & Francisco Lagos, 2010. "The power of delegation: Allowing workers to choose their wage," ThE Papers 09/07, Department of Economic Theory and Economic History of the University of Granada..

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