Results on stability and gift-exchange

Bejarano, Corgnet, and Gómez-Miñambres have a newly published paper on gift-exchange.

Abstract: We extend Akerlof’s (1982) gift-exchange model to the case in which reference wages respond to changes in economic conditions. Our model shows that these changes spur disagreements between workers and employers regarding the reference wage. These disagreements tend to weaken the gift-exchange relationship, thus reducing production levels and wages. We find support for these predictions in a controlled yet realistic workplace environment. Our work also sheds light on several stylized facts regarding employment relationships, such as the increased intensity of labor conflicts when economic conditions are unstable.

Next, I will provide some background on gift-exchange and experiments.

There is a Wikipedia page on the gift-exchange game in which someone summarized the model and experimental research up to about 2007.

Usually “exchange” means a trade of one valued good for another. Both parties of a trade might be assumed to exchange simultaneously. If the gift-exchange game payoffs are modeled in normal form, then the payoff matrix is the same as a Prisoner’s dilemma. The employer’s payoff is higher if the worker puts in high effort, however high effort is costly to the worker.

When players move in sequence, the employer has to move first. If the employer offers a low salary, then we expect the worker to reciprocate by giving low effort. Effort is called a “gift” because, according to this game, there is no way to punish low effort. A worker choosing costly effort is gifting their work to the employer, after observing what the employer has agreed to pay unconditionally. If the employer offers a high wage, then this could inspire the worker to gift back high effort.

For example, if a retail shop owner hires a customer service agent, then the shop owner wants the agent to work quickly and make customers feel good. It is difficult to monitor the performance of this agent accurately at all times. If the retail shop owner pays above-market-clearing wages to the agent, then that might motivate the employee to do a good job. Conversely, if you feel that you are being treated poorly, what is your usual response?  

If the retail shop owner if paying high (above-market-rate) wages, then lots of people want the job as the customer service agent. The number of workers supplied at the high wage is larger than the number of workers demanded at the high wage. Thus, there is involuntary unemployment. Achieving a better understanding of unemployment is one of the motivations for taking this model to the lab.

Backward induction would lead to the bad equilibrium in which workers shirk and wages are low. This low-trust society is a poor society. In the 1990’s, some of the first gift-exchange experiments demonstrated that workers and employers can achieve the good outcome just through positive reciprocity.

There have been many interesting variations and extensions in laboratory and field settings. I recommend the Bejarano, Corgnet, and Gómez-Miñambres (BCG) paper as a guide to the literature.

More recently, since it is well-established that positive reciprocity can be achieved by lab subjects, we (including myself) have been experimenting with how a cooperative group is affected by “shocks”. Shocks does not mean electric shocks to the players, to be clear! A negative shock in BCG’s experiment specifically was implemented as follows: The normal baseline condition is that each task performed by a worker generated $0.60 for the employer. The harder the employee works, the more tasks they get done, and the more cumulative income the employer subject earns. After a negative shock, the bad economic condition is realized by lowering the value of the worker tasks to $0.20. A negative shock has nothing to do with how hard the employee works. Consider that a wonderful construction worker is going to be in trouble if the demand for new housing drops the way it did in 2008.

BCG consider both negative and positive shocks to a gift-exchange environment. It’s easy to imagine how cooperation could break down after a negative shock. BCG also found that subjects disagreed on what should be done after a positive shock, when the labor of the worker becomes more valuable. Thus, their conclusion is that instability of all kinds weakens the gift-exchange relationship.

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