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Reciprocal fairness and gift exchange practices in the labor

  • Stephane Mahuteau

    (University of Western Sydney)

We aim at investigating to what extent reciprocal considerations, exhibited by employers and employees, should lead to stable gift exchange practices in the labor contract, giving rise to non- compensating wage differentials among industries. We use the concept of Sequential Reciprocity Equilibrium developed by Dufwenberg & Kirchsteiger (1998) to incorporate players’ preferences for reciprocity in their utility function. We model the labor relation through a one shot sequential gift giving game between an employer who proposes a wage given the employee’s profitability level as exogenous and an employee who chooses his level of effort. We show that successful gift exchange practices may arise if both players are actually motivated by reciprocity. Even though intentions act as a catalyst of opportunistic behaviors, the respect of the equity norm makes mutual cooperation more likely. We propose a direct evaluation of the determinants of gift exchange practices between French employers and employees, estimating the probabilities to observe productivity increases following upon the settlement of rent-sharing agreements in the firm. Whether we estimate the probability for the employer to propose a rent-sharing agreement or the probability for the employees to raise their effort, we show that there exists an endogeneity bias related to the variable chosen as proxy to express the agents’ perception of their opponent’s fairness. This result gives support to the hypothesis that French employers and employees’ decisions are directly influenced by reciprocity concerns. Our results give support to the Akerlof & Yellen’s fair wage effort hypothesis as an explanation of the persistence of non-compensating wage differentials.

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File URL: http://econwpa.repec.org/eps/lab/papers/0211/0211004.pdf
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Paper provided by EconWPA in its series Labor and Demography with number 0211004.

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Length: 31 pages
Date of creation: 20 Nov 2002
Date of revision:
Handle: RePEc:wpa:wuwpla:0211004
Note: Type of Document - pdf; prepared on IBM PC - PC; to print on HP/PostScript/Franciscan monk; pages: 31 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Hilderth, A.K. & Oswald, A.J., 1993. "Rent-Sharing and Wages: Evidence form Company and Establishment Panels," Economics Series Working Papers 99154, University of Oxford, Department of Economics.
  2. Jonathan S. LEONARD & Marc Van AUDENRODE, 1996. "Worker's Limited Liability, Turnover and Employment Contracts," Annales d'Economie et de Statistique, ENSAE, issue 41-42, pages 41-77.
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  4. Goux, Dominique & Maurin, Eric, 1999. "Persistence of Interindustry Wage Differentials: A Reexamination Using Matched Worker-Firm Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 492-533, July.
  5. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1996. "Reciprocal fairness and noncompensating wage differentials," ULB Institutional Repository 2013/5921, ULB -- Universite Libre de Bruxelles.
  6. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  7. Tompkinson, Paul & Bethwaite, Judy, 1995. "The ultimatum game: raising the stakes," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 439-451, August.
  8. Margin Dufwenberg & Georg Kirchsteiger, 2001. "A Theory of Sequential Reciprocity," Levine's Working Paper Archive 563824000000000090, David K. Levine.
  9. Georg Kirchsteiger, 1994. "The role of envy in ultimatum games," ULB Institutional Repository 2013/5925, ULB -- Universite Libre de Bruxelles.
  10. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  11. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
  12. Robert Slonim & Alvin E. Roth, 1998. "Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic," Econometrica, Econometric Society, vol. 66(3), pages 569-596, May.
  13. Levine, David I, 1993. "Fairness, Markets, and Ability to Pay: Evidence from Compensation Executives," American Economic Review, American Economic Association, vol. 83(5), pages 1241-59, December.
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  15. Bewley, Truman F, 1995. "A Depressed Labor Market as Explained by Participants," American Economic Review, American Economic Association, vol. 85(2), pages 250-54, May.
  16. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
  17. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May.
  18. Croson, Rachel T. A., 1996. "Information in ultimatum games: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 197-212, August.
  19. John M. ABOWD & Laurence ALLAIN, 1996. "Compensation Structure and Product Market Competition," Annales d'Economie et de Statistique, ENSAE, issue 41-42, pages 207-217.
  20. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1992. "Wages, Profits and Rent-Sharing," NBER Working Papers 4222, National Bureau of Economic Research, Inc.
  21. Akerlof, George A & Yellen, Janet L, 1988. "Fairness and Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 44-49, May.
  22. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  23. Geanakoplos, John & Pearce, David & Stacchetti, Ennio, 1989. "Psychological games and sequential rationality," Games and Economic Behavior, Elsevier, vol. 1(1), pages 60-79, March.
  24. 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.
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