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Reciprocity and Payment Schemes: When Equality Is Unfair

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Author Info
Johannes Abeler () (IZA Bonn and University of Bonn)
Steffen Altmann () (IZA Bonn and University of Bonn)
Sebastian Kube () (University of Karlsruhe)
Matthias Wibral () (IZA Bonn and University of Bonn)

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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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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
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Handle: RePEc:iza:izadps:dp2500

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

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Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gächter, Simon & Nosenzo, Daniele & Sefton, Martin, 2008. "The Impact of Social Comparisons on Reciprocity," IZA Discussion Papers 3639, Institute for the Study of Labor (IZA). [Downloadable!]
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