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Gift Exchange and Reciprocity in Competitive Experimental Markets

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Author Info

  • Fehr, Ernst

    (Institute for Empirical Research in Economics, University of Zürich)

  • Kirchsteiger, Georg

    (Department of Economics, University of Vienna)

  • Riedl, Arno

    (Department of Economics, Institute for Advanced Studies, Vienna)

Abstract

One of the outstanding results of three decades of laboratory market research is that under rather weak conditions prices and quantities in competitive experimental markets converge to the competitive equilibrium. Yet, the design of these experiments ruled out gift exchange or reciprocity motives, that is, subjects could not reciprocate for a gift. This paper reports the results of experiments which do not rule out reciprocal interactions between buyers and sellers. Sellers have the opportunity to choose quality levels which are above the levels enforceable by buyers. In principle they can, therefore, reward buyers who offer them high prices. Yet, such reciprocating behaviour lowers sellers' monetary payoff and is, hence, not subgame perfect. The data reveal that a majority of sellers behave reciprocally and that this behaviour is anticipated by buyers. As a result, buyers are willing to pay prices which are substantially above sellers' reservation prices. These results indicate that reciprocity motives may indeed be capable of driving a competitive experimental market permanently away from the competitive outcome. The data, therefore, support the gift exchange approach to the explanation of involuntary unemployment.

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File URL: http://www.ihs.ac.at/publications/eco/es-14.pdf
File Function: First version, 1995
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 14.

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Length: 24 pages
Date of creation: Sep 1995
Date of revision:
Handle: RePEc:ihs:ihsesp:14

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Keywords: Gift Exchange; Reciprocity; Experiments;

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References

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  1. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  2. Guth, Werner & Tietz, Reinhard, 1990. "Ultimatum bargaining behavior : A survey and comparison of experimental results," Journal of Economic Psychology, Elsevier, vol. 11(3), pages 417-449, September.
  3. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May.
  4. Alvin E. Roth & V. Prasnikar & M. Okuno-Fujiwara & S. Zamir, 1998. "Bargaining and market behavior in Jerusalem, Liubljana, Pittsburgh and Tokyo: an experimental study," Levine's Working Paper Archive 344, David K. Levine.
  5. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May.
  6. Kirchsteiger, Georg, 1994. "The role of envy in ultimatum games," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 373-389, December.
  7. Gary E Bolton & Rami Zuwick, 2010. "Anonymity versus punishments in ultimatum bargaining," Levine's Working Paper Archive 826, David K. Levine.
  8. Georg Kirchsteiger & Ernst Fehr, 1994. "Insider power, wage discrimination, and fairness," ULB Institutional Repository 2013/5923, ULB -- Universite Libre de Bruxelles.
  9. Fehr, Ernst, et al, 1998. "When Social Norms Overpower Competition: Gift Exchange in Experimental Labor Markets," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 324-51, April.
  10. Ochs, Jack & Roth, Alvin E, 1989. "An Experimental Study of Sequential Bargaining," American Economic Review, American Economic Association, vol. 79(3), pages 355-84, June.
  11. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  12. Cason, Timothy N. & Williams, Arlington W., 1990. "Competitive equilibrium convergence in a posted-offer market with extreme earnings inequities," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 331-352, December.
  13. Kachelmeier, Steven J. & Shehata, Mohamed, 1992. "Culture and competition: A laboratory market comparison between China and the West," Journal of Economic Behavior & Organization, Elsevier, vol. 19(2), pages 145-168, October.
  14. Fehr, Ernst & Kirchsteiger, Georg & Riedl, Arno, 1996. "Involuntary unemployment and non-compensating wage differentials in an experimental labour market," Open Access publications from Maastricht University urn:nbn:nl:ui:27-16459, Maastricht University.
  15. Bolton, Gary E, 1991. "A Comparative Model of Bargaining: Theory and Evidence," American Economic Review, American Economic Association, vol. 81(5), pages 1096-136, December.
  16. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  17. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
  18. repec:att:wimass:9323 is not listed on IDEAS
  19. Plott, Charles R & Smith, Vernon L, 1978. "An Experimental Examination of Two Exchange Institutions," Review of Economic Studies, Wiley Blackwell, vol. 45(1), pages 133-53, February.
  20. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-79, May.
  21. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
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