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Deferred Compensation and Gift Exchange: An Experimental Investigation into Multi-Period Labor Markets

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Author Info

  • Huck, Steffen

    ()
    (University College London)

  • Seltzer, Andrew

    ()
    (Royal Holloway, University of London)

  • Wallace, Brian

    ()
    (Royal Holloway, University of London)

Abstract

This paper examines the relationship between firms’ wage offers and workers’ supply of effort using a three-period experiment. In equilibrium, firms will offer deferred compensation: first period productivity is positive and wages are zero, while third period productivity is zero and wages are positive. The experiment produces strong evidence that deferred compensation increases worker effort; in about 70 percent of cases subjects supplied the optimal effort given the wage offer, and there was a strong effort response to future-period wages. We also find some evidence of gift exchange; worker players increased the effort levels in response to above equilibrium wage offers by a human, but not in response to similar offers by a computer. Finally, we find that firm players who are initially hesitant to defer compensation learn over time that it is beneficial to do so.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1193.

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Length: 30 pages
Date of creation: Jun 2004
Date of revision:
Publication status: published in: American Economic Review, 2011, 101 (2), 819-843
Handle: RePEc:iza:izadps:dp1193

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Related research

Keywords: gift exchange; deferred compensation; pensions; experimental labor economics; personnel economics; incentives; shirking;

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References

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  1. Jagadeesh Gokhale & Erica L. Groshen & David Neumark, 1993. "Do Hostile Takeovers Reduce Extramarginal Wage Payments?," NBER Working Papers 4346, National Bureau of Economic Research, Inc.
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  4. Fehr, Ernst & Kirchsteiger, Georg & Riedl, Arno, 1996. "Involuntary Unemployment and Non-compensating Wage Differentials in an Experimental Labour Market," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(434), pages 106-21, January.
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  11. Joanne Salop & Steve Salop, 1976. "Self-selection and turnover in the labor market," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 80, Board of Governors of the Federal Reserve System (U.S.).
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  13. Salop, Joanne & Salop, Steven, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 619-27, November.
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  15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
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Cited by:
  1. Daniel van Vuuren & Paul de Hek, 2010. "Are older workers overpaid? A literature review," CPB Discussion Paper 165, CPB Netherlands Bureau for Economic Policy Analysis.

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