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Reciprocity and Wage Undercutting

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  • Dufwenberg, Martin

    (Dept. of Economics, Stockholm University)

Abstract

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.

Suggested Citation

  • Dufwenberg, Martin, 1999. "Reciprocity and Wage Undercutting," Research Papers in Economics 1999:13, Stockholm University, Department of Economics.
    • Handle: RePEc:hhs:sunrpe:1999_0013
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    References listed on IDEAS

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    More about this item

    Keywords

    Reciprocity; wage underbidding; unemployment;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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