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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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high efforts from the agents. The average effort difference between the WLT and the IWT of only 0.36 is insignificant (Mann-Whitney test: p = 0.83). Compared to the EWT, efforts are on average 3.44 units higher in the wage-level treatment (MannWhitney test: p 0.01). As in the IWT, efforts do not decrease over time in the WLT (Wilcoxon test for periods 1–6 against 7–12: p = 0.44). Also the distribution of efforts in the WLT closely resembles the one in the IWT. Under both treatments, the modal choice is the provision of maximum effort. In the WLT, an effort level of 10 is chosen in 46.5% of all cases, compared to 49% in the IWT.

Result 8: The wage level treatment shows that the treatment difference between the IWT and the EWT is not caused by the fact that principals can set two wages instead of one per se. Differences in equity norm fulfillment— independent of intentionality—seem to be the driving force behind agents’ performance.

Taken together, the results from the additional control treatment corroborate our previous findings. They suggest that the observed performance differences are not driven by the differing degree of intentionality across treatments. This, of course, does not imply that intentions are unimportant in general; however in our setup, treatment differences are almost exclusively driven by equity considerations.

4 Conclusions

In this paper, we studied the interaction of gift exchange with different payment modes;

more specifically, we analyzed how horizontal fairness concerns of employees affect the effectiveness of gift exchange as a contract enforcement device. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. The use of equal wages elicits substantially lower efforts and efficiency in spite of similar monetary incentives: exerting high effort pays off under both wage schemes. The strong treatment difference seems to be driven by subjects’ preferences for horizontal equity and the fact that the equity principle is frequently violated in the equal wage treatment. This is not the case in the individual wage treatment, as principals set wages almost always in line with the norm of equity.

The results of a control treatment support the notion that indeed norm fulfillment per se and not different degrees of intentionality are the driving force behind agents’ behavior.

Our results have a number of implications, both for the advancement of existing theories and for the design of wage schemes in practice. First of all, while it is wellknown that equal wages can distort monetary incentives, in our experiment they are efficiency decreasing even though individuals’ monetary incentives are qualitatively not affected. Rather, equal wages oftentimes lead to situations which are considered as unfair by the workforce. This holds in particular because agents are heterogeneous and equal wages violate the equity principle whenever workers differ in their performance.

It may thus be oversimplifying to argue that equal wages lead to less envy and therefore higher work morale, as it is frequently done in the political discussion.

In this regard, it is doubtful whether strict wage equality can be reconciled with the use of reciprocal gift exchange to enforce incomplete contracts. Our findings suggest that adherence to the norm of equity is a necessary prerequisite for a successful giftexchange relation. Consequently, the wage setting institution must provide principals with means to account for possible differences in agents’ behavior, e.g., to individually reward agents who outperform their co-workers. The performance of agents in the individual wage treatment and in the wage level treatment shows how effective gift exchange can be, as long as horizontal equity concerns are respected: although explicit contract enforcement is absent, 80% of the possible efficiency gains are realized.

In practice, the discretion to fulfill the norm of equity does not have to be in monetary terms. Perks and non-monetary benefits like extra vacation or awards can be useful devices to motivate workers in this context. These instruments become especially important when it is not possible to wage discriminate on a given hierarchical level, e.g., because the firm’s internal pay structure, agreements with a union or legislation dictate wage equality.

The results in this paper should not be interpreted as arguments against wage equality in general. They rather suggest that equal wages come at a cost that has to be weighed against their potential benefits. For example, equal wages are easier to implement than individual wages, and they may encourage peer monitoring and collaboration. The relative importance of these costs and benefits (and also the impact of the workforce’s social preferences more generally) is likely to depend on the details of the institutional setting. These include the production technology, the information structure, and the organizational design of the firm. In this paper we presented results for one such setting. Our design provides a simple and parsimonious framework that can successively be enriched to study these aspects in future research.

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