Abstract: Many experimental studies indicate that people are motivated by reciprocity. Rabin (1993) develops techniques for incorporating such concerns into game theory and economics. His model, however, does not fare well when applied to situations with an interesting dynamic structure (like many experimental games), because it is developed for normal form games in which information about the sequential structure of a strategic situation is suppressed. In this paper we develop a theory of reciprocity for extensive games in which the sequential structure of a strategic situation is made explicit. We propose a new solution concept— sequential reciprocity equilibrium—which is applicable to extensive games, and we prove a general equilibrium existence result. The model is applied in several examples, including some well known experimental games like the Ultimatum game and the Sequential Prisoners’ Dilemma.

This paper proposes a new model of the link between expanding trade and rising wage inequality in developing countries, and investigates its causal implications in a newly constructed panel of Mexican manufacturing establishments. In a theoretical setting with heterogeneous firms and quality differentiation, only the most productive firms in a developing country like Mexico enter the export market, and they produce a better-quality good for export than for the domestic market in order to appeal to richer developed-country consumers. Producing high-quality goods requires paying high wages both to white-collar and to blue-collar – but especially to white-collar – employees. An increase in the incentive for developing-country producers to export generates differential quality upgrading within industries, as more-productive firms increase exports and produce a greater share of high-quality goods, while less-productive firms remain focused on the domestic market. This process raises wage inequality both between firms and within the firms that upgrade. The empirical part of the paper uses a major exchange rate shock – the Mexican peso crisis of late 1994 – to test this causal mechanism. I find robust evidence that during the years of the crisis initially more-productive plants increased both white-collar and blue-collar wages and

Abstract not found

Employees are motivated intrinsically as well as extrinsically. Intrinsic motivation is crucial when tacit knowledge in and between teams must be transferred. Organizational forms enable different kinds of motivation and have different capacities to generate and transfer tacit knowledge. Since knowledge generation and transfer are essential for a firm s sustainable competitive advantage, we ask specifically what kinds of motivation are needed to generate and transfer tacit knowledge, as opposed to explicit knowledge.

Much of economic analysis stems from the joint assumptions of rationality and individual greed. Common sense and experimental and field evidence point to the limits of this

Recent evidence highlights the importance of social norms in many economic relations. However, many of these relationships are long-term and provide repeated game incentives for performance. We experimentally investigate interaction effects of reciprocity and repeated game incentives in two treatments (one-shot and repeated) of a gift-exchange game. In both treatments we observe reciprocity, which is strengthened in the repeated game. A detailed analysis shows that in the repeated game some subjects imitate reciprocity. Thus, reciprocity and repeated game incentives reinforce each other. Observed behaviour is robust against experience. We conclude that a long-term interaction is a “reciprocity-compatible” contract enforcement device.

The motivation crowding effect suggests that an external intervention via monetary incentives or punishments may undermine (and under different indentifiable conditions strengthen) intrinsic motivation. As of today, the theoretical possibility of crowding effects is widely accepted among economists. Many of them, however, have been critical about its empirical relevance. This survey shows that such scepticism is unwarranted and that there exists indeed compelling empirical evidence for the existence of crowding out and crowding in. It is based on circumstantial insight, laboratory studies by both psychologists and economists as well as field research by econometric studies. The presented pieces of evidence refer to a wide variety of areas of the economy and society and have been collected for many different countries and periods. Crowding effects thus are an empirically relevant phenomenon, which can, in specific cases, even dominate the traditional relative price effect. Keywords: Crowding effect, intrinsic motivation, principal-agent theory, economic psychology, experiments JEL-Codes: A12, J33, L22 1 Prof. Bruno S. Frey, Institute for Empirical Economic Research, Bl mlisalpstrasse 10, CH-8006 Z rich, Switzerland, Tel. +41-1-634-37-30/31, eMail: bsfrey@iew.unizh.ch 1. Background The basic idea that rewards, and in particular monetary rewards, may crowd out intrinsic motivation emanates from two quite different branches of literature in the social sciences. Thirty years ago in his book The Gift Relationship Titmuss (1970) argued that paying for blood undermines cherished social values and would therefore reduce or totally destroy peoples willingness to donate blood. Though he was unable to come up with any serious empirical evidence his thesis attracted much att...

psychological considerations such as fairness and reciprocity are important in individual decision-making, there is little explicit empirical evidence of reciprocal altruism in economic environments. This paper tests whether attribution of volition in choosing a wage has a significant effect on subsequent costly effort provision. An experiment was conducted in which subjects are first randomly divided into groups of employers and employees. Wages were selected and employees asked to choose an effort level, where increased effort is costly to the employee, but highly beneficial to the employer. The wage-determination process was common knowledge and wages were chosen either by the employer or by an external process. There is evidence for both distributional concerns and reciprocal altruism. The slope of the effort/wage profile is clearly positive in all cases, but is significantly higher when wages are chosen by the employer, offering support for the hypothesis of reciprocity. There are implications for models of utility and a critique of some current models is presented. ∗ Financial support from the Vice-Chancellor for Research Fund at UC Berkeley is gratefully acknowledged. I thank George Akerlof, Ernst Fehr, Li Gan, Matthew Rabin, and anonymous referees for helpful comments and suggestions. I also thank the participants and organizers of the 1994 Russell Sage Foundation Behavioral Economics Summer Institute for ideas regarding the interface of psychology and economics

Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and discuss a set of experiments designed to test these contrasting claims. We found that the effect of monetary compensation on performance was not monotonic. In the treatments in which money was offered, a larger amount yielded a higher performance. However, offering money did not always produce an improvement: subjects who were offered monetary incentives performed more poorly than those who were offered no compensation. Several possible interpretations of the results are discussed. I.

A substantial number of people exhibit social preferences, which means they are not solely motivated by material self-interest but also care positively or negatively for the material payoffs of relevant reference agents. We show empirically that economists fail to understand fundamental economic questions when they disregard social preferences, in particular, that without taking social preferences into account, it is not possible to understand adequately (i) effects of competition on market outcomes, (ii) laws governing cooperation and collective action, (iii) effects and the determinants of material incentives, (iv) which contracts and property rights arrangements are optimal, and (v) important forces shaping social norms and market failures.