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When No Bad Deed Goes Punished: Relational Contracting in Ghana and the UK

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  • Davies, Elwyn
  • Fafchamps, Marcel

Abstract

Experimental evidence to date supports the double theoretical prediction that parties transacting repeatedly punish bad contractual performance by reducing future offers, and that the threat of punishment disciplines opportunistic breach. We conduct a repeated gift-exchange experiment with university students in Ghana and the UK. The experiment is framed as an employment contract. Each period the employer makes an irrevocable wage offer to the worker who then chooses an effort level. UK subjects behave in line with theoretical predictions and previous experiments: wage offers reward high effort and punish low effort; this induces workers to choose high effort; and gains from trade are shared between workers and employers. We do not find such evidence among Ghanaian subjects: employers do not reduce wage offers after low effort; workers often choose low effort; and employers earn zero payoffs on average. These results also hold if we use a strategy method to elicit wage offers. Introducing competition or reputation does not significantly improve workers' effort. Using a structural bounds approach, we find that the share of selfish workers in Ghana is not substantially different from the UK or earlier experiments. We conclude that strategic punishment in repeated labor transactions is not a universally shared heuristic.

Suggested Citation

  • Davies, Elwyn & Fafchamps, Marcel, 2018. "When No Bad Deed Goes Punished: Relational Contracting in Ghana and the UK," CEPR Discussion Papers 13057, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13057
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    References listed on IDEAS

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    More about this item

    Keywords

    conditional reciprocity; Ghana; gift-exchange game; punishment strategies; relational contracting;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D2 - Microeconomics - - Production and Organizations
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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