Reciprocity and Payment Schemes: When Equality Is Unfair

Johannes Abeler, Steffen Altmann, Sebastian Kube and Matthias Wibral ()
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Matthias Wibral: Maastricht University

No 2500, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: A growing literature stresses the importance of reciprocity, especially for employment relations. In this paper, we study the interaction of different payment modes with reciprocity. In particular, we analyze how equal wages affect performance and efficiency in an environment characterized by contractual incompleteness. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. We find that the use of equal wages elicits substantially lower efforts and efficiency. This is not caused by monetary incentives per se since under both wage schemes it is profit-maximizing for agents to exert high efforts. The treatment difference is rather driven by the fact that reciprocity is violated far more frequently in the equal wage treatment. Agents suffering from a violation of reciprocity subsequently withdraw effort. Our results suggest that individual reward and punishment opportunities are crucial for making reciprocity a powerful contract enforcement device.

Keywords: incomplete contracts; social norms; reciprocity; gift exchange; wage setting; wage equality; laboratory experiment; multiple agents (search for similar items in EconPapers)
JEL-codes: C92 J33 J41 M12 M52 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-12
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Reciprocity and Payment Schemes: When Equality Is Unfair (2006)
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