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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, 1992. "Do hostile takeovers reduce extramarginal wage payments?," Working Paper 9215, Federal Reserve Bank of Cleveland.
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  8. Iris Bohnet & Bruno S. Frey & Steffen Huck, . "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," IEW - Working Papers 052, Institute for Empirical Research in Economics - University of Zurich.
  9. Ernst Fehr & Alexander Klein & Klaus Schmidt, 2001. "Fairness, Incentives and Contractual Incompleteness," CESifo Working Paper Series 445, CESifo Group Munich.
  10. 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.
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  12. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  13. Salop, Joanne & Salop, Steven, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 619-27, November.
  14. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1996. "Involuntary unemployment and non-compensating wage differentials in an experimental labour market," ULB Institutional Repository 2013/5917, ULB -- Universite Libre de Bruxelles.
  15. Ernst Fehr & Armin Falk, 2003. "Wage Rigidity in a Competitive Incomplete Contract Market," Labor and Demography 0305001, EconWPA.
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Cited by:
  1. Paul Hek & Daniel Vuuren, 2011. "Are older workers overpaid? A literature review," International Tax and Public Finance, Springer, vol. 18(4), pages 436-460, August.

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