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How Do Agents React to Dynamic Wage Increases? An Experimental Study

60 Pages Posted: 4 Apr 2016  

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Peter Werner

University of Cologne - Department of Economics

Abstract

We investigate how workers' performance is affected by the timing of wages in a real-effort experiment. In all treatments agents earn the same wage sum but wage increases are distributed differently over time. We find that agents work harder under increasing wage profiles if they do not know these profiles in advance. A profile that continuously increases wages by small amounts raises performance by about 15% relative to a constant wage. The effort reactions can be organized by a model in which agents reciprocally respond to wage impulses, comparing wages to an adaptive reference standard determined by the previous wage.

Keywords: wage, reciprocity, reference point

JEL Classification: M12, C91

Suggested Citation

Sliwka, Dirk and Werner, Peter, How Do Agents React to Dynamic Wage Increases? An Experimental Study. IZA Discussion Paper No. 9855. Available at SSRN: https://ssrn.com/abstract=2757965

Dirk Sliwka (Contact Author)

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Peter Werner

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

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