The gift of advice: communication in a bilateral gift exchange game
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The gift of advice: communication in a bilateral gift exchange game David J. Cooper · John P. Lightle
Received: 25 April 2012 / Accepted: 13 December 2012 © Economic Science Association 2013
Abstract We augment a standard bilateral gift exchange game so employees can send messages at the same time as choosing an effort level. Employee effort (controlling for wages) is unaffected by allowing messages, but wages dramatically increase. Messages affect wages because employees give managers advice to set higher wages, usually explaining that this will result in higher effort. This advice prompts managers to try higher wages, helping them learn that raising wages increases their payoffs. In a follow-up experiment, we directly provide managers with additional information about the relationship between wages and effort. This too causes wages to increase, but to a lesser extent than allowing messages. Our results highlight the critical role of learning in generating gains from positive gift exchange. Keywords Gift exchange · Communication · Advice · Learning · Experiment JEL Classification C70 · C92 · D23 · J30 1 Introduction Fehr et al. (1993) inaugurated one of the most influential literatures within experimental economics. Standard economic theory built on the assumption that individuals are 1 Incomplete meaning that workers cannot pre-commit to an effort level and managers have no means
of sanctioning low effort either through enforceable incentive contracts or termination of the manageremployee relationship. Electronic supplementary material The online version of this article (doi:10.1007/s10683-012-9347-3) contains supplementary material, which is available to authorized users. D.J. Cooper Department of Economics, Florida State University and School of Economics, University of East Anglia, Norwich, UK J.P. Lightle () Department of Economics, Florida State University, Tallahassee, FL 32306-2180, USA e-mail: [email protected]
D.J. Cooper, J.P. Lightle
self-regarding predicts that the relationship between wages and effort in a labor market with incomplete contracts should be flat.1 Instead, a strong positive relationship is observed between wages and effort, a finding that has been replicated many times (see Cooper and Kagel 2013). Fehr et al. and most of its numerous successors share two important features which motivate the experiments we report below. First, reciprocity can only occur through a single channel, effort. In reality there are many ways employees can reciprocate the wage choices of their manager. If the existence of alternative means of reciprocation affects the relationship between effort and wages, then experiments lacking alternative channels of reciprocation may misrepresent this relationship. Our experiments add a simple, natural channel of reciprocation to a bilateral gift exchange game: communication. A second feature of experiments on gift exchange plays an important, if generally unrecognized role, in generating the main results. The strong relationship between wages and effort can be seen e
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