Experimental Economics

, Volume 19, Issue 3, pp 535–561 | Cite as

The influence of potential on wages and effort

  • Gary Bolton
  • Peter WernerEmail author
Original Paper


We investigate how employee potential influences wage offers and effort exertion in a gift exchange experiment. In particular, we test if gift exchange based on a commonly accepted norm for wage differentiation can emerge in a setting where the wage demands of agents are heterogeneous. We also analyse how communication by principals responds to the unequal wage demands and how it influences agents’ decisions about working effort in the presence of varying degrees of bargaining power. We find that differences in productivity and the resulting entitlements lead to differentiation in wages. High productivity agents are offered substantially higher wages than low productivity agents. Results from a control experiment suggest that a large part of this wage markup is related to the future productivity potential of high performers. At the same time, unequal wage schemes do not substantially crowd out effort exertion: we observe no strong detrimental effects from disadvantageous relative wage positions. Certain communication patterns significantly influence effort exertion.


Communication Entitlements Fairness norms Gift exchange Relative wages 

JEL Classification

J31 M52 D63 C92 



Financial support of the German Research Foundation through the Gottfried Wilhelm Leibniz Prize awarded to Axel Ockenfels and through the research unit “Design and Behavior” (FOR 1371) is gratefully acknowledged. We thank the Editor, two anonymous referees, Christian Thöni as well as conference and seminar audiences in Cologne, Göttingen, Karlsruhe, Maastricht, New York and Sydney for valuable comments and James Fan for his help in collecting the experimental data. This paper replaces a former working paper version with the title “Are Efficiency Wages Equality Wages? Exogenously Induced Fairness Norms in Working Environments”.

Supplementary material

10683_2015_9453_MOESM1_ESM.docx (71 kb)
Supplementary material 1 (DOCX 71 kb)


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Copyright information

© Economic Science Association 2015

Authors and Affiliations

  1. 1.Jindal School of ManagementUniversity of Texas at DallasRichardsonUSA
  2. 2.Department of EconomicsUniversity of CologneCologneGermany

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