What determines reciprocity in employment relations? We conducted a controlled eld experiment and tested the extent to which cash and non-monetary gifts affect workers' productivity. Our main nding is that the nature of the gift, not its monetary value, determines the prevalence of reciprocal reactions. A gift in-kind results in a significant and substantial increase in workers ' productivity. An equivalent cash gift, on the other hand, is largely ine ective even though an additional experiment showed that workers would strongly favor the gift's cash equivalent.

Contractual incompleteness characterizes many employment relations. High work morale is therefore fundamental for sustaining voluntary cooperation within the firm. In the presence of reciprocity motives, wages can influence work morale. Using a natural field experiment, we provide clear-cut evidence showing that wage cuts have a significant and large negative impact on work morale. An equivalent wage increase, however, results in a much weaker gain in productivity. Together, the results highlight a strongly asymmetric response of effort to wage variations.

Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analyzing extended versions of the model allows us to examine how organizational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. We use the UK-WERS workplace compensation data set to confirm the predictions of our extended model.

We study the impact of reputational incentives in markets characterised by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterised by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks. Severe moral hazard problems are pervasive in many labour, credit and goods markets. Reputational incentives are likely to play an important role in such markets (MacLeod, 2007) but empirical evidence on the role of reputation is still scarce. This article assesses empirically the impact of reputational incentives on contract enforcement, the distribution of gains from trade and the structure of interactions between contracting partners in a competitive environment with severe moral hazard

Without contracting or repetition, purely self-regarding agents will not trade. To what extent can social preferences, such as altruism or a concern for fairness, generate efficient bilateral exchange? I analyze a simple exchange game: A purely self-regarding first mover transfers some amount of a commodity to a second mover. Then the second mover, who has social preferences defined over material payoffs, transfers a commodity back to the first mover. I identify key properties of social preferences that matter for bilateral exchange behavior. I find the equilibrium will be efficient if either (1) the second mover’s transfer is monetary (i.e., material payoffs are quasi-linear in the second mover’s commodity), or (2) the second mover’s social preferences cause him to behave in accordance with a “fairness rule ” (such as the 50-50 sharing norm). The results may explain why small-scale transactions with discretionary monetary payment are common, and suggest that social norms that prescribe fair allocations promote efficiency in exchange environments.

conference on economic institutions and behavioral economics. This is a very rough working draft for the conference. The Mark Twain apology applies, we wish we had more time to write less. Comments are genuinely appreciated, especially on what to cut, and on important omissions (self-serving ones are expected). Ideas from the NBER Organizational Economics conference in March, 2004, particularly Bob Gibbons’s presentation, was useful, as were discussions with Chip Heath and Sendhil Mullainathan. 0 This essay is about how behavioral economics can be applied to organizations, and can also be enriched by thinking about how individuals behave in organizations. Behavioral economics modifies economic theory to account for normal limits on rational calculation, willpower and greed, and the natural psychophysical properties of preference and judgment (e.g. Mullainathan and Thaler, 2001; Camerer and Loewenstein, 2004). Thinking about organizations naturally extends this definition to include how socialization and identity shape individual behavior. (While little about these extensions will be discussed in this paper, see Akerlof and Kranton, 2003). From a methodological perspective, behavioral economics is simply a humble

There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. 2008) suggest that competition forces people to behave as if they were purely selfinterested. We qualify this view. Social preferences are irrelevant if and only if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets.

Preliminary First Version Please do not cite without permission! Many labor markets are characterized by long-term employment relations and incomplete labor contracts. The employees ’ effort, in particular, is typically not contractible so that effort needs to be enforced endogenously in repeated interactions. Theory and evidence shows that under these conditions fairness concerns play an important role in affecting effort choices and wage setting, rendering wage levels and wages ’ responsiveness to shocks rather rigid. In addition, loss aversion and money illusion interact with fairness concerns to generate downwards nominal wage rigidity and- in case of strong unions- downwards real wage rigidity. Thus, key structural features of labor markets such and long-term relations and contractual incompleteness and the psychological forces of fairness concerns, loss aversion and money illusion lead to substantial departures from the predictions of the standard competitive model, rendering this model problematic for policy prescriptions. We illustrate this claim for two policy domains- monetary policy and minimum wage legislation.

Though there appears to be ample evidence for the presence of reciprocal motivations in lab experiments, recently there has been some discussion about the empirical importance of reciprocity as a motivating force. We build on the theoretical results from our earlier paper, Englmaier and Leider (2008), and argue that in the discussion so far an important aspect was not accounted for: the ability of the agent to “repay the gift”. We conduct a real effort experiment where we vary the effect of the agent’s effort on the principal’s payoff. Furthermore we collect additional information that allows us to control for the agents ’ effort costs and whether they can be classified as reciprocal or not. From our model we derive non-trivial predictions on how different types of individuals will react to our experimental variation and confirm them in our experimental data.

I develop a model of contracting under reciprocal altruism accounting for some evidence which is paradoxical from the point of view of neoclassical models with selfish actors. My model predicts the crowding-out effect observed in the Trust Game with the possibility of a fine; for the Control Game the model predicts that an equilibrium can exhibit ”no effect of control”, ”hidden cost of control”, or ”positive effect of control”, depending on the characteristics of the actors, as observed in the lab. This suggests that reciprocal altruism modeling could be fruitful more generally in applications of contract theory.