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«IZA DP No. 4262 PAPER Gift Exchange and Workers’ Fairness Concerns: When Equality Is Unfair Johannes Abeler DISCUSSION Steffen Altmann Sebastian ...»

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The strong difference in effort choices suggests that the degree to which gift exchange can mitigate contract enforcement problems depends on the payment mode that is used. Wage equality hampers efficiency, and we hypothesized above that this might be due to horizontal fairness concerns. However, performance differences might also 60%

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be driven by differing monetary incentives across treatments. To rule this out, we take a closer look at principals’ wage setting and the resulting monetary incentives for the agents.

Figure 3 plots the average wage per effort level in the two treatments. For both treatments we take the wage paid by the principal for each individual effort decision and calculate averages for a given effort level. The graph exhibits the upward sloping effort-wage relation of many gift-exchange experiments. For example, an agent in the equal wage treatment who exerts an effort of 1 receives on average a wage of 6.3 while an agent exerting an effort of 10 receives an average wage of 30.3. In the individual wage treatment, the corresponding wages are 1.7 and 39.5.8 The effort-wage relation indicates that gift exchange indeed occurs between principals and agents. In both treatments, higher effort levels are reciprocated with higher wages.

Since principals in the EWT have to pay the same wage to both agents, an interesting question concerns how they choose this wage when confronted with a low and a high effort. To answer this question, we assume that the wage-effort relation from the IWT reflects the “true” wage-setting preferences of principals because wage choices are not constrained in this treatment. We regress wages on effort in the IWT and calculate predicted wages for all possible levels of effort. We then calculate the differences between actual wages paid in the EWT and these predicted wages. This analysis shows that the actual wage in the EWT is very close to the average between the predicted wage for the higher and lower effort. This means that principals in the EWT weight the higher and lower effort about equally when deciding on the wage payment.

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Result 2: Principals reward higher effort levels with higher wages in both treatments.

Reciprocal behavior of principals generates monetary incentives for the agents. In order to calculate the monetary incentives entailed in principals’ wage decisions, one has to take into account agents’ cost of effort exertion (see Table 1). Qualitatively, this does not change the picture of the effort-wage relation: higher effort levels seem to lead not only to higher wages, but also to higher profits for the agents. To check this in more detail, we estimate an OLS-model where we regress the agent’s profit per period πAi on his effort level ei and a constant. To account for potential differences between treatments we include a treatment dummy IW T, and an interaction term of the treatment dummy and the agent’s effort. IW T equals 1 for the individual wage treatment and 0 for the equal wage treatment. Reported robust standard errors are adjusted for clustering within matching groups. Estimation results are shown in Column 1 of Table 3. The coefficients indicate that the effort-profit relation is indeed positive in both treatments. On average, an additional unit of effort increases the agent’s profit under equal wages by 1.031 points. This coefficient is weakly significant.

In the individual wage treatment the effort-profit relation is slightly steeper: an effort increase of 1 leads to an increase in agent’s profit of 1.804 points (1.031 + 0.773). The difference between treatments, however, is not significant.

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Table 3: Profit regressions. Robust standard errors are adjusted for clustered matching groups and are given in parentheses. For each firm, one observation per period is included in the analysis. The dummy “IWT” is equal to 1 for the individual wage treatment. Significance at the 10%, 5% and 1% level is denoted by *, **, and ***, respectively.

Column 2 of Table 3). The results indicate that the co-worker’s effort choice has a substantial impact on an agent’s profit under wage equality while it has a negligible influence if individual wages are paid. An increase in agent j’s effort increases agent i’s profit in a given period by 2.774 points in the EWT, while the (insignificant) influence in the IWT is −0.404 (= 2.774 − 3.178). However, it is still individually profitable for the agents to exert high efforts in the EWT. An additional unit of (own) effort increases the agent’s profit by 0.854 points.9 Our findings concerning agents’ monetary One could object that subjects in the experiment did not have access to the analyses we just presented, because these are “ex-post” examinations while subjects only observed behavior and outcomes of their previous groups. We therefore calculate the profit-maximizing effort level for each agent in each period based on the information this subject actually has. If we assume that agents choose the effort level that was on average the most profitable of all effort levels they have observed so far, the calculations show that agents in the EWT could have increased their efforts and profits considerably incentives can thus be summarized as follows.

Result 3: The wages paid by principals imply similar monetary incentives in both treatments. A higher effort level leads to a higher profit in both treatments.

3.3 The Importance of Equity In light of the previous result, the strong differences in actual efforts and especially the low effort levels under equal wages are remarkable and stress the significance of non-pecuniary motivations for agents’ performance. Agents under equal wages predominantly choose low efforts, thereby foregoing considerable profits. Apparently, equal wages are not reconcilable with agents’ horizontal fairness considerations. On the other hand, agents under individual wages provide very high effort levels. Thus, aggregate behavior is consistent with the predictions of equity-concerned agents. We therefore focus our analysis of non-monetary motivations on the question whether individual behavior is also in line with a concern for the fulfillment of the norm of equity.

3.3.1 Agents’ Reactions to Norm Violations

We first analyze how agents react to a violation of the norm of equity. Equity theory argues that agents experience distress from inequity and take action to reduce it— which in our setup means to increase or decrease work effort. The direction of the effort adjustment should depend on the type of norm violation. An equity-concerned agent who works more but does not receive a higher payoff than his co-worker faces a disadvantageous norm violation. To restore equity, he can only decrease his effort.

Analogously, his co-worker who exerts a lower effort and earns a higher profit faces an advantageous norm violation and should increase his effort.10 even by using only their limited information. In the last period, the average profit-maximizing effort level exceeds the average actual level in that period by 61%. By contrast, the average actual effort levels of subjects in the IWT are very close to the profit-maximizing levels.

More precisely, an advantageous norm violation comprises all cases when efforts are equal but profit is higher, or when effort is lower but profit is not. A disadvantageous norm violation occurs if efforts are equal but profit is lower, or if effort is higher but profit is not.

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Table 4 shows how often agents decrease, increase or do not change their effort from period t to t + 1 after they experienced no, an advantageous or a disadvantageous norm violation in period t. The top panel of Table 4 reports data for the equal wage treatment. When the norm is fulfilled, most agents keep their effort constant (54%) and slightly more agents increase their effort than decrease it. After experiencing an advantageous norm violation, agents tend to increase their effort (44%) and only few reduce it (12%). The opposite is true after a disadvantageous norm violation: the majority of agents decrease their effort (53%) and only few increase their effort in the following period (14%). In line with equity theory these numbers suggest that agents change their effort provision in the direction that makes a violation less likely to occur in the next period.

Behavior in the individual wage treatment (bottom panel) is very similar to behavior in the EWT for the cases of no violation and disadvantageous violations. When the norm is not violated agents mostly keep their effort unchanged. After a disadvantageous norm violation efforts are decreased rather than increased, as in the EWT. The only difference between treatments is observed when agents experience an advantageous norm violation: agents in the IWT tend to decrease their effort while the EWT agents tend to increase it in this case.11 We checked the robustness of the reaction patterns in several ways. For example, it could be that The pattern of individual reactions to norm violations indicates that agents care about equity; we therefore check next how often norm violations occur in the two treatments. We expected to see more norm violations in the EWT than in the IWT, because the equal wage institution forces principals to set wages that are not in line with the norm of equity whenever agents exert different efforts. This is indeed what we observe. While the norm is violated in 87% of all cases (460 out of 528) in the EWT, the figure for the IWT is only 15% of all cases (80 out of 528). Thus, even if individual reactions in a given situation are similar, agents in the EWT are far more often exposed to norm violations than agents in the IWT. Principals in the IWT seem to understand quite well that agents care about equity and use the possibility to set different wages in a sophisticated way. If efforts differ, they reward the more hardworking agent with a higher wage in 90% of these cases. If agents exert the same effort, principals pay equal wages in 90% of the cases.

Result 4: Agents mostly react to disadvantageous violations of the norm of equity by reducing their effort and by increasing it after an advantageous norm violation. The norm of equity is far more often violated in the equal wage treatment.

So far we have seen that agents’ reactions are largely in line with the hypotheses of equity theory and that treatments differ with respect to the frequency of equity-norm violations. Yet, this is not sufficient to explain the treatment effect, since a norm violation is always advantageous for one agent and at the same time disadvantageous for the other one. If both agents adjust their effort in a similar way but in opposite directions the adjustments will cancel out. However, previous evidence suggests that reactions to a disadvantageous norm violation are stronger than reactions to an advantageous one (e.g., Loewenstein et al. 1989, Mowday 1991, Th¨ni and G¨chter 2008).

o a If this is the case, norm violations could explain the downward trend in the EWT and agents react differently to norm violations if they are paid very high or low absolute wages. However, performing the analysis only for agents receiving a wage out of the top or bottom quartile of the ex-post wage distribution does not alter the result. An implicit assumption of our analysis is that the gift-exchange relation is generally intact between principal and agent, i.e., that agents exert a non-minimal effort and that principals pay a positive wage. The results do not change if one restricts the analysis to these cases. Also if one defines gift exchange as requiring the agent’s profit to be positive, i.e. wi c(ei ) instead of wi 0, the results are very similar.

the treatment difference in effort provision.

Figure 4 shows the average magnitude of changes in effort provision from period t to period t + 1 after an agent experienced no norm violation, a disadvantageous or an advantageous norm violation in period t. The width of the bars corresponds to the number of observations in the respective category (cf. last column of Table 4).

When the equity-norm is not violated agents tend to keep their effort constant or even slightly increase it. After a disadvantageous norm violation, agents in the EWT react strongly. They decrease their effort by 1.30. Their co-worker, experiencing an advantageous norm violation, increases his effort but not as strongly. He raises his effort by only 0.75. The difference is statistically significant (Wilcoxon test of the absolute values: p = 0.01). In the IWT, both groups of agents experiencing a norm violation decrease their effort. The strength of reactions indicate that agents suffer more from a disadvantageous norm violation than from an advantageous one. This results in an overall decrease of efforts after a norm violation.

Result 5: Agents’ reactions to a violation of the norm of equity are asymmetric: the negative reaction of the disadvantaged agents is stronger than the reaction of the advantaged agents. This asymmetry in agents’ reactions leads to an overall negative time trend in efforts for the EWT and in the strong treatment difference in effort.

The analysis above suggests that agents care about equity and experience the equal wage scheme as unfair. Interestingly, even the principals consider the equal wage scheme as less fair. In the post-experimental questionnaire, principals were presented three hypothetical game situations that included effort choices, wage choices, and the resulting payoffs for all players. They were asked whether they considered the resulting allocation as just. One of the three situations reflected their own average behavior in the experiment.12 The principals did not know that they were facing their own past decisions when answering the question. 63% of the principals in the IWT considered their own decisions fair while only 38% of the principals in the EWT shared this view This situation was constructed as follows: We calculated the average effort of the higher-effort and of the lower-effort providers that the principals actually faced during the experiment. We then took the average of the wages the principals paid to the two groups. Finally, we calculated hypothetical payoffs for all three “average” players by considering the costs of the average efforts.


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