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Reciprocity and Wage Undercutting

  • Dufwenberg, Martin

    ()

    (Dept. of Economics, Stockholm University)

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    It is well-documented that employers refuse to hire workers who offer their services at less than the prevailing wage. The received explanation is that workers are motivated by reciprocity¾ they desire to reward kindness and punish hostility. To refuse an outsider’s under-bid is viewed as a kind choice that is met with good effort; a low wage is viewed as an insult that is met with shirking. We have developed a general theory of reciprocity which in this paper is applied to a wage-setting game played by an employer and two workers. We show that when workers are motivated by reciprocity, equilibrium behaviour accords well with the aforementioned stylized facts.

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    File URL: http://www2.ne.su.se/paper/wp99_13.pdf
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    Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 1999:13.

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    Length: 17 pages
    Date of creation: 04 Nov 1999
    Date of revision:
    Handle: RePEc:hhs:sunrpe:1999_0013
    Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
    Phone: +46 8 16 20 00
    Fax: +46 8 16 14 25
    Web page: http://www.ne.su.se/
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    4. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
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    13. Anderson, Simon P. & Goeree, Jacob K. & Holt, Charles A., 1998. "A theoretical analysis of altruism and decision error in public goods games," Journal of Public Economics, Elsevier, vol. 70(2), pages 297-323, November.
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    17. Gary Charness, 1996. "Attribution and reciprocity in a simulated labor market: An experimental investigation," Economics Working Papers 283, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1997.
    18. repec:dgr:kubcen:199844 is not listed on IDEAS
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