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Reciprocity and Wage Undercutting


  • Dufwenberg, Martin

    () (Dept. of Economics, Stockholm University)


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

    1. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 255-283.
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    6. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February.
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    13. 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.
    14. Bewley, Truman F., 1998. "Why not cut pay?," European Economic Review, Elsevier, vol. 42(3-5), pages 459-490, May.
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    More about this item


    Reciprocity; wage underbidding; unemployment;

    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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