Abstract
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.
Similar content being viewed by others
Notes
Using an extensive field data set from German retail banks, Kampkötter and Sliwka (2011) find that wage differentiation has a positive impact on subsequent performance. For more general theoretical analyses of how norms in the workplace influence behavior of employees and how they interact with incentives see Sliwka (2007), Ellingsen and Johannesson (2008b) and Fischer and Huddart (2008).
In the context of a trilateral gift exchange game where the principal does not have the possibility to choose unequal wage profiles, Thöni and Gächter (2015) also observe peer effects with respect to effort choices.
The form of the payoff function was chosen to ensure that the department head could not suffer losses in the experiment.
The procedure ensured that either 27 or 30 subjects per session could interact in new department head—employee combinations for 9 rounds without being matched with previously assigned partners.
The positive wage-effort relationship can be organized by theories of reciprocity (Rabin 1993; Dufwenberg and Kirchsteiger 2004; Falk and Fischbacher 2006) and inequality aversion (Fehr and Schmidt 1999; Bolton and Ockenfels 2000). There is experimental evidence that the inclusion of multiple agents in the gift exchange game does not change the fundamental behavioral patterns (see Maximiano et al. 2007). For surveys of gift exchange experiments see Gächter and Fehr (2002) and, for more recent evidence, Fehr et al. (2009) and Charness and Kuhn (2011).
Communication can be a powerful means to establish cooperation in social dilemmas (see, for example Bohnet and Frey 1999; Bochet and Putterman 2009, for recent evidence and Balliet 2010, for a survey of the literature) and it increases transfers in dictator games (Rankin 2006; Mohlin and Johannesson 2008). Promises, i.e. non-binding statements of intended behavior, can positively influence beliefs about trustworthiness and subsequently the willingness to trust (Charness and Dufwenberg 2006). Brandts and Cooper (2007) investigate how communication influences behavior of employees in a company turnaround game (similar to a weakest-link game by van Huyck et al. 1990) and find that the possibility of a manager to communicate with her subordinates improves coordination to a larger extent than increasing financial incentives. Moreover, in a recent study of a turnaround game, Brandts, Cooper and Weber (forthcoming) show that leaders are able to substantially improve efficient coordination within groups by means of communication. In particular, elected leaders are more successful than random leaders, because they succeed in sending more substantive messages to agents.
In one session of the BASE treatment that was conducted with 27 participants, 1 participant left during the experiment. In our analysis, we excluded the decisions of this subject and all interactions with other participants.
An analogous result is found if we run the model separately for high and low performers or additionally control for the relative performance differences between the employees (models not reported here).
To rule out the possibility that our results are affected by an interdependency of the variables HIGHPROD and CORRECT, we calculate models including fixed effects per experimental worker with the same dependent variables as in Model 2, separately for each of our three treatments (not reported here). From the two variables that refer to entitlements, only HIGHPROD enters the regressions as it varies over the rounds. Yet, our previous conclusions do not change. Moreover, average effort levels chosen in the experiment are uncorrelated with a subject’s performance in the quiz task so that we have no indication that the variable CORRECT affects effort through a channel other than entitlements for wages.
Our results do not change if we calculate all models with the full sample.
In Models 8, 9, 12 and 13, we had to exclude observations with a value of zero for OWNWAGE, as REL_WAGEDIFF is not defined in these cases.
To check if previous wages serve as a reference point and have an impact of effort decisions, we calculate models similar to Models 6–9 reported in Table 6 and additionally include a variable for the employee’s wage in the last round (models not reported here). In these models we find a positive impact of the last round wage for effort of low productivity workers in a given round. Hence, it seems that besides the importance of the wage in the present round, there is also a path dependency of effort choices in the sense that low productivity agents respond more positively the higher the previous wage was. For high performers, we do not find a similar effect. All our previous conclusions remain similar.
If we compare the coding of the three RAs and calculate measures for the inter-rater reliability in all message categories, we obtain values for Kappa between 0.621 and 0.853, indicating satisfactory agreement among coders.
An obvious question is whether department heads use the message content strategically. Our data provides mixed evidence for such a pattern: if we calculate models with the wage paid as the dependent variable similar to the models reported in Sect. 3.1 (not reported here), we find that categories POLITENESS and EFFORT_DEMAND are positively correlated with wages while there is a negative correlation to the category EXCUSE. All other message types are not significantly related to wage choices.
We conducted two experimental sessions of the RANDOM treatment in December 2014 at the LEMA (Pennsylvania State University) in which altogether 51 subjects participated. Subjects remained in the laboratory for approximately an hour; the average payoff accounted for 11.69 US-Dollars (standard deviation: 5.19 US-Dollars). Due to the fact that only 21 subjects arrived at the laboratory in the second session, a perfect strangers matching could only be implemented for 7 rounds; in the remaining rounds 8 and 9, agents were matched to principals they had previously interacted with.
References
Abeler, J., Altmann, S., Kube, S., & Wibral, M. (2010). Gift exchange and workers’ fairness concerns: When equality is unfair. Journal of the European Economic Association, 8(6), 1299–1324.
Akerlof, G. A., & Yellen, J. L. (1990). The fair wage-effort hypothesis and unemployment. Quarterly Journal of Economics, 105(2), 255–283.
Balliet, D. (2010). Communication and cooperation in social dilemmas: A meta-analytic review. Journal of Conflict Resolution, 54, 39–57.
Bardsley, N., Cubitt, R., Loomes, G., Moffatt, P., Starmer, C., & Sugden, R. (2009). Experimental economics: Rethinking the rules. Princeton: Princeton University Press.
Bochet, O., & Putterman, L. (2009). Not just babble: Opening the black box of communication in a voluntary contribution experiment. European Economic Review, 53, 309–326.
Bohnet, I., & Frey, B. S. (1999). The sound of silence in prisoner’s dilemma and dictator games. Journal of Economic Behavior & Organization, 38, 43–57.
Bolton, G. E., & Karagözoğlu, E. (2014). On the influence of hard leverage in a soft leverage bargaining game: The importance of credible claims. Working Paper.
Bolton, G. E., & Ockenfels, A. (2000). ERC: A theory of equity, reciprocity and competition. American Economic Review, 90(1), 166–193.
Bracha, A., Gneezy, U., & Loewenstein, G. (2015). Relative pay and labor supply. Journal of Labor Economics, 33(2), 297–315.
Brandts, J., & Cooper, D. (2007). It´s what you say not what you pay. Journal of the European Economic Association, 5(6), 1223–1268.
Brandts, J., & Cooper, D., & Weber, R. (forthcoming). Legitimacy, communication and leadership in the turnaround game. Management Science.
Buchan, N., Johnson, E., & Croson, R. (2006). Let’s get personal: An international examination of the influence of communication, culture and social distance on other regarding preferences. Journal of Economic Behavior & Organization, 60, 373–398.
Burchett, R., & Willoughby, J. (2004). Work productivity when knowledge of different reward systems varies: Report from an economic experiment. Journal of Economic Psychology, 25, 591–600.
Card, D., Mas, A., Moretti, E., & Saez, E. (2012). Inequality at work: The effect of peer salaries on job satisfaction. American Economic Review, 102(6), 2981–3003.
Charness, G., & Dufwenberg, M. (2006). Promises and partnership. Econometrica, 74, 1579–1601.
Charness, G., & Dufwenberg, M. (2010). Bare promises. Economics Letters, 107, 281–283.
Charness, G., & Gross, T., & Guo, C. (2014). Merit pay and wage compression with productivity differences and uncertainty. Working Paper.
Charness, G., & Kuhn, P. (2007). does pay inequality affect worker effort? Experimental evidence. Journal of Labor Economics, 25(4), 693–723.
Charness, G., & Kuhn, P. (2011). Lab labor: What can labor economists learn from the lab? In O. Ashenfelter & D. Card (Eds.), Handbook of labor economics (Vol. 4, Part A, pp. 229–330). San Diego: North-Holland.
Cherry, T. L., Frykblom, P., & Shogren, J. F. (2002). Hardnose the dictator. American Economic Review, 92(4), 1218–1221.
Clark, A. E., Masclet, D., & Villeval, M.-C. (2010). Effort and comparison income: Experimental and survey evidence. Industrial and Labor Relations Review, 63, 407–426.
Clark, A. E., & Oswald, A. J. (1996). Satisfaction and comparison income. Journal of Public Economics, 61(3), 359–381.
Cohn, A., Fehr, E., Herrmann, B., & Schneider, F. (2014). Social comparison and effort provision: Evidence from a field experiment. Journal of the European Economic Association, 12(4), 877–898.
Cooper, D., & Lightle, J. (2013). The gift of advice: Communication in a bilateral gift exchange game. Experimental Economics, 16(4), 443–477.
Dufwenberg, M., & Kirchsteiger, G. (2004). A theory of sequential reciprocity. Games and Economic Behavior, 47, 268–298.
Ellingsen, T., & Johannesson, M. (2008a). Anticipated verbal feedback induces altruistic behavior. Evolution and Human Behavior, 29(2), 100–105.
Ellingsen, T., & Johannesson, M. (2008b). Pride and prejudice: The human side of incentive theory. American Economic Review, 98(3), 990–1008.
Englmaier, F., Strasser, S., & Winter, J. (2014). Worker characteristics and wage differentials: Evidence from a gift-exchange experiment. Journal of Economic Behavior & Organization, 97, 185–203.
Falk, A., & Fischbacher, U. (2006). A theory of reciprocity. Games and Economic Behavior, 54, 293–315.
Fehr, E., Gächter, S., & Kirchsteiger, G. (1997). Reciprocity as a contract enforcement device: Experimental evidence. Econometrica, 65(4), 833–860.
Fehr, E., Götte, L., & Zehnder, C. (2009). A behavioral account of the labor market: The role of fairness concerns. Annual Review of Economics, 1, 355–384.
Fehr, E., Kirchsteiger, G., & Riedl, A. (1993). Does fairness prevent market clearing? An experimental investigation. Quarterly Journal of Economics, 108, 437–460.
Fehr, E., & Schmidt, K. (1999). A theory of fairness, competition, and cooperation. Quarterly Journal of Economics, 114, 817–868.
Ferrer-i-Carbonell, A. (2005). Income and well-being: An empirical analysis of the comparison income effect. Journal of Public Economics, 89(5–6), 997–1019.
Fischbacher, U. (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178.
Fischer, P., & Huddart, S. (2008). Optimal contracting with endogenous social norms. American Economic Review, 98(4), 1459–1475.
Gächter, S., & Fehr, E. (2002). Fairness in the labour market: A survey of experimental results. In B. Friedel & M. Lehmann-Waffenschmidt (Ed.), Surveys in experimental economics. Bargaining, cooperation and election stock markets (pp. 95–132). Heidelberg: Physica.
Gächter, S., Nosenzo, D., & Sefton, M. (2012). The impact of social comparisons on reciprocity. Scandinavian Journal of Economics, 114(4), 1346–1367.
Gächter, S., Nosenzo, D., & Sefton, M. (2013). Peer effects in pro-social behavior: Social norms or social preferences? Journal of the European Economic Association, 11(3), 548–573.
Gächter, S., & Riedl, A. (2005). Moral property rights in bargaining with infeasible claims. Management Science, 51(2), 249–263.
Gächter, S., & Thöni, C. (2010). Social comparison and performance: Experimental evidence on the fair wage-effort hypothesis. Journal of Economic Behavior & Organization, 76(3), 531–543.
Greenberg, J. (1990). Employee theft as a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 75(5), 561–568.
Greiner, B., Ockenfels, A., & Werner, P. (2011). Wage transparency and performance: A real-effort experiment. Economics Letters, 111, 236–238.
Güth, W., & Kocher, M. G. (2014). More than thirty years of ultimatum bargaining experiments: Motives, variations, and a survey of the recent literature. Journal of Economic Behavior & Organization, 108, 396–409.
Güth, W., Königstein, M., Kovácsa, J., & Zala-Mezõ, E. (2001). Fairness within firms: The case of one principal and multiple agents. Schmalenbach Business Review, 53, 82–101.
Hennig-Schmidt, H., Rockenbach, B., & Sadrieh, A. (2010). In search of workers’ real effort reciprocity—A field and a laboratory experiment. Journal of the European Economic Association, 8(4), 817–837.
Hoffman, E., & Spitzer, M. L. (1985). Entitlements, rights, and fairness: An experimental examination of subjects’ concepts of distributive justice. Journal of Legal Studies, 14(2), 259–297.
Kampkötter, P., & Sliwka, D. (2011). Differentiation and performance: An empirical investigation on the incentive effects of bonus plans. IZA Discussion Paper No. 6070.
Karagözoglu, E., & Riedl, A. (forthcoming). Performance information, production uncertainty, and subjective entitlements in bargaining. Management Science.
Luttmer, E. (2005). Neighbors as negatives: Relative earnings and well-being. Quarterly Journal of Economics, 120(3), 963–1002.
Maximiano, S., Sloof, R., & Sonnemans, J. (2007). Gift exchange in a multi-worker firm. Economic Journal, 117(522), 1025–1050.
Mohlin, E., & Johannesson, M. (2008). Communication: Content or relationship? Journal of Economic Behavior & Organization, 65, 409–419.
Ockenfels, A., Sliwka D., & Werner, P. (forthcoming). Bonus payments and reference point violations. Management Science.
Rabin, M. (1993). Incorporating fairness into game theory and economics. American Economic Review, 83, 1281–1302.
Rankin, F. W. (2006). Requests and social distance in dictator games. Journal of Economic Behavior & Organization, 60, 27–36.
Rivas, M. F. (2009). Wage dispersion and workers’ effort. Economics Bulletin, 29(2), 788–794.
Schaubroeck, J., May, D. R., & Brown, F. W. (2000). Procedural justice explanations and employee reactions to economic hardship: A field experiment. Journal of Applied Psychology, 79(3), 455–460.
Sliwka, D. (2007). Trust as a signal of a social norm and the hidden costs of incentive schemes. American Economic Review, 97, 999–1012.
Thöni, C., & Gächter, S. (2015). Peer effects and social preferences in voluntary cooperation: A theoretical and experimental analysis. Journal of Economic Psychology, 48, 72–88.
van Huyck, J., Battalio, R. C., & Beil, R. O. (1990). Tacit coordination games, strategic uncertainty, and coordination failure. American Economic Review, 80(1), 234–248.
Werner, S., & Ones, D. S. (2000). Determinants of perceived pay inequities: The effects of comparison other characteristics and pay-system communication. Journal of Applied Social Psychology, 30(6), 1281–1309.
Acknowledgments
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”.
Author information
Authors and Affiliations
Corresponding author
Electronic supplementary material
Below is the link to the electronic supplementary material.
Rights and permissions
About this article
Cite this article
Bolton, G., Werner, P. The influence of potential on wages and effort. Exp Econ 19, 535–561 (2016). https://doi.org/10.1007/s10683-015-9453-0
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10683-015-9453-0