Reciprocity and Payment Schemes: When Equality is Unfair

28 Pages Posted: 11 Jan 2007

See all articles by Johannes Abeler

Johannes Abeler

IZA Institute of Labor Economics; University of Nottingham

Steffen Altmann

University of Copenhagen; IZA Institute of Labor Economics

Sebastian Kube

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; University of Bonn

Matthias Wibral

Maastricht University, School of Business and Economics; IZA Institute of Labor Economics

Date Written: December 2006

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: laboratory experiment, wage setting, wage equality, gift exchange, reciprocity, social norms, incomplete contracts, multiple agents

JEL Classification: C92, J33, J41, M12, M52

Suggested Citation

Abeler, Johannes and Altmann, Steffen and Kube, Sebastian and Wibral, Matthias, Reciprocity and Payment Schemes: When Equality is Unfair (December 2006). IZA Discussion Paper No. 2500. Available at SSRN: https://ssrn.com/abstract=955819

Johannes Abeler (Contact Author)

IZA Institute of Labor Economics ( email )

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

University of Nottingham

University Park
Nottingham, NG8 1BB
United Kingdom

Steffen Altmann

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

IZA Institute of Labor Economics ( email )

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

Sebastian Kube

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

University of Bonn

BWL 1
Adenauerallee 24-42
Bonn, D-53012
Germany

Matthias Wibral

Maastricht University, School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

IZA Institute of Labor Economics

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

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