The Combined Effect of Wages and Firm Profit on Employee Effort

Posted: 19 Jul 2004

See all articles by R. Lynn Hannan

R. Lynn Hannan

Tulane University - A.B. Freeman School of Business

Abstract

This study investigates whether paying higher wages motivates employees to provide higher effort and whether firm profit moderates this relation. Consistent with gift exchange (Akerlof 1982) and reciprocity (Rabin 1993) models, my experimental results show that workers provided more effort when they were paid higher wages even though there was no ex post financial reward for doing so. Moreover, firm profit influenced the relation between wages and effort. Workers provided higher effort when firm profit decreased compared to when it increased. This suggests that the degree of reciprocity is affected by firm profit. However, workers' responded asymmetrically to firm profit, in that they behaved as if they expected to share in firm profit increases but not decreases. Although firms were fairly adept at predicting the profit-maximizing wage strategy, they apparently did not anticipate workers' reluctance to share in firm profit decreases.

Keywords: reciprocity, implicit contracts, social preferences, experimental markets

JEL Classification: M40, M46, M12, J30, J41, M50, M52, M14

Suggested Citation

Hannan, Rebecca Lynn, The Combined Effect of Wages and Firm Profit on Employee Effort. Available at SSRN: https://ssrn.com/abstract=565366

Rebecca Lynn Hannan (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

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