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The Limits of Gift Exchange

The Limits of Gift Exchange. Judd Kessler Harvard University ESA World Meeting 30 June 2007. Gift Exchange. Gift exchange experiments show that subjects act reciprocally (Fehr, Kirchsteiger and Riedl, 1993).

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The Limits of Gift Exchange

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  1. The Limits of Gift Exchange Judd Kessler Harvard University ESA World Meeting 30 June 2007

  2. Gift Exchange • Gift exchange experiments show that subjects act reciprocally (Fehr, Kirchsteiger and Riedl, 1993). • These results are used to support the Gift Exchange Model of the labor market (Akerlof, 1982; Akerlof and Yellen, 1990). • Experimental results are robust to changes in market structure between firms and workers (Fehr, Kirchler, Weichbold and Gächter, 1998). • Many experiments have replicated these results. • However, these gift exchange experiments might be subject to confounds…

  3. Gift Exchange Confounds • Two potential confounds • distributional concerns • relative wealth varies with size of the first-stage gift • the worker almost always has a larger endowment than the firm at the time of the effort choice • surplus seeking • returning effort increases the social surplus • there is a potential interaction between being relatively rich and surplus seeking (Charness and Rabin, 2002) • Part of the gift exchange we observe in the lab could result from distributional concerns and surplus seeking.

  4. Experimental Design • Subjects play 24 rounds of a bilateral gift exchange game as either a worker or a firm. • They are randomly rematched with a player of the opposite type each round (two sessions so far, n1=18 and n2=28). • Subjects are paid on one randomly selected round (average earnings so far are $20.13 per subject, including $10 show up fee).

  5. Experimental Design • At the start of each round, the firm has 30 units and the worker has 35 units in their endowments. • The round consists of three stages • The firm chooses a wage of level 0, 5 or 10 units, which is multiplied by 4 and transferred to the worker. • A random outcome determines • whether the firm receives an additional 60 units (is rich) or 0 units (is poor) • whether transfers from the worker to the firm are multiplied by 4 or multiplied by 1 • The worker chooses to transfer any number of units between 0 and 10 to the firm, which is multiplied by 1 or 4, as determined by the random outcome.

  6. Experimental Results (4-to-1) • When the firm is poor, subjects replicate standard gift exchange results. • When the firm is rich, gift exchange is diminished, but still present.

  7. Experimental Results (1-to-1) • When the firm is poor, gift exchange is strong and results replicate trust experiments (Berg, Dickhaut and McCabe, 1995). • When the firm is rich, gift exchange is severely diminished.

  8. Conclusions • Gift exchange is sensitive to the relative wealth of the players and the efficiency of transfers. • Distributional concerns and surplus seeking may be important in gift exchange games. • Gift exchange may not characterize relationships between firms (or managers) that are rich relative to their workers.

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