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Reciprocity and Payment Schemes: When Equality Is Unfair

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Author Info

  • Abeler, Johannes

    ()
    (University of Oxford)

  • Altmann, Steffen

    ()
    (IZA)

  • Kube, Sebastian

    ()
    (University of Bonn)

  • Wibral, Matthias

    ()
    (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 efficiency 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 efficiency. 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2500.

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Length: 28 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2500

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Related research

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

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References

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Cited by:
  1. Simon Gaechter & Daniele Nosenzo & Martin Sefton, 2010. "The Impact of Social Camparisons of Reciprocity," Discussion Papers 2010-10, 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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