L5: Trust cont., Gift exchange games Flashcards
What do Chaudhuri et al (2007) investigate?
Role of expectations in a trust game
How do Chaudhuri et al (2007) investigate their question?
They try to prompt strategic reasoning by asking:
1) Each sender if they expected to receive anything back, and if so, how much?
2) The senders to write down their MOTIVES in sending money to the receiver
4 main findings of Chaudhuri et al (2007)?
1) Amount of money expected back significantly affects amount sent
2) Sig. difference between amount sent of those who expected more and less than 1/3 back ($2.14 to $6.05)
3) Positive correlation between amount sent and amount expected back
4) Positive correlation between amount sent and amount sent back
Example (beyond ebay) where trust play a role in economics?
Principal-agent problem (eg. CEO and SHs in a firm)
Given we cannot rely on trust, how will a well designed employment contract work?
Should be contingent on explicit incentive compatible amounts
ie. incentives for performing well, penalties for performing poorly
(without incentive for employee to perform well may -> lower profits)
Explain Akerlof’s ‘Gift Exchange’ employment model?
Workers: work in excess of minimum standard
Employers: pay wages in excess of market equilibrium
If classic model of D and S of workers is correct (ie. determined by market eq.) then firms may find it advantageous to pay higher wage and in response workers may find it advantageous to work with higher effort
What did Fehr et al. (1993) test?
Wage-effort hypothesis in the context of a competitive experimental market
Explain the structure of Fehr et al. (1993)?
One-sided oral auction:
5/6 firms make wage offers each round to the 8/9 workers (over the phone) and they decide:
a) whether to accept or not
b) effort levels if they accept
If gift exchange model is wrong what would we expect? (Fehr et al. (1993))
Workers have no incentive to give more than the minimum effort, and tf firms have no incentive to pay more than the minimum wage
If gift exchange model is right what would we expect? (Fehr et al. (1993))
Would expect to see firms offering in excess of the minimum wage and in return workers choose effort levels in excess of the minimum
4 main findings of Fehr et al. (1993)?
1) avg. wage offered is 72 and avg. effort is 0.4
2) Higher the wage, higher the mean and median effort levels offered (across all wage levels)
3) avg. wages do not converge to market-clearing wage
4) avg. effort exceeds minimum effort in all 12 periods of the sessions
Main conclusion of Fehr et al. (1993)?
1) If employers offer generous wages employees will likely work harder (strong positive effect, doesn’t seem to erode over time) (Therefore support for G.E. model)
