Deferred Compensation and Gift Exchange: An Experimental Investigation into Multi-Period Labor Markets

Steffen Huck, Andrew Seltzer () and Brian Wallace ()

No 1193, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: This paper examines the relationship between firms’ wage offers and workers’ supply of effort using a three-period experiment. In equilibrium, firms will offer deferred compensation: first period productivity is positive and wages are zero, while third period productivity is zero and wages are positive. The experiment produces strong evidence that deferred compensation increases worker effort; in about 70 percent of cases subjects supplied the optimal effort given the wage offer, and there was a strong effort response to future-period wages. We also find some evidence of gift exchange; worker players increased the effort levels in response to above equilibrium wage offers by a human, but not in response to similar offers by a computer. Finally, we find that firm players who are initially hesitant to defer compensation learn over time that it is beneficial to do so.

Keywords: deferred compensation; pensions; experimental labor economics; personnel economics; gift exchange; incentives; shirking (search for similar items in EconPapers)
JEL-codes: C91 J31 J41 M51 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-lab
Date: 2004-06
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