Reciprocity and Incentive Pay in the Workplace

Abstract

We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker's effort nor manager's attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We test these predictions using German Socio-Economic Panel data. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay.

Keywords: reciprocity, social exchange, incentive contracts, double moral hazard, GSOEP

JEL Classification: D86, J41, M51, M52, M54, M55