Respect as an Incentive
Tor Eriksson
(Aarhus School of Business and CCP, Aarhus University)
Marie Claire Villeval
GATE-CNRS, University of Lyon, IZA and CCP
Preliminary draft
Abstract: It is increasingly recognized that effort and performance depend not only on the
monetary incentives provided to employees, but also on non-monetary sources of motivation.
Analyses of non-monetary sources of motivation have demonstrated the importance of social
preferences, or in other words of “what others do”. Considerably less attention has, however,
been paid to the impact of “what others think” on individual effort and performance. In this paper
we add to this literature by examining respect as a non-monetary source of motivation. The
employer is expressing respect by giving the employee costly symbolic rewards. The employee
can react to respect, or lack thereof, by changing her effort or the length of the employment
relationship.
Our experiment, which builds on the repeated gift-exchange game of Brown, Falk and Fehr
(2004), sheds light on the extent to which symbolic rewards are used, how they are valued by the
employees, and how they affect employee effort, the duration of relationships, and profits of
employers. Furthermore, we also study whether employers’ decisions to give symbolic rewards
are driven by strategic considerations. We find that employers do make use of symbolic rewards
and chiefly to express their satisfaction with the employee. Symbolic rewards are associated with
higher profits and increased probability of continuing employment relationships.
Keywords: Respect, Symbolic rewards, Incentives, Labor market, Experiment
JEL Codes: C91, J32, J64, M52
Contact : Tor Eriksson, Department of Economics, Aarhus School of Business, Aarhus
University: Frichshuset, Hermodsvej 22, 8230 Åbyhøj, Denmark. E-mail: tor@asb.dk. Marie
Claire Villeval, GATE, CNRS, University of Lyon, 93, Chemin de Mouilles, 69130, Ecully,
France, IZA, Germany, and CCP, Denmark. E-mail: villeval@gate.cnrs.fr.
Acknowledgements: The authors are grateful to participants at the CCP Workshop on Personnel
Economics in December 2009 for comments on an earlier version. We thank Sylvain Ferriol for
skillful programming and Julie Rosaz and Luigi Butera for research assistance in the laboratory.
Financial support from the EMIR program of the French National Agency for Research (ANR
BLAN07-3_185547) is gratefully acknowledged.
1
1. INTRODUCTION
In parallel with the accumulated research-based knowledge about the role and
significance of monetary incentives in improving the performance of organizations, it has
become increasingly clear that people are motivated not only because of material rewards
and that accounting for this may be crucial. To HRM specialists and social psychologists
this comes as no surprise, as it has been a central part of the bundle of factors they
emphasize in research as well as in giving advice to management. They base their
arguments on a large literature in social psychology and sociology demonstrating that
cognitive processes like anchoring, attribution, social comparisons, and concerns for
distributive and procedural justice are important because they affect intrinsic motivation.
They also pay more attention to how rewards are framed and determined than we as
economists do.1
Recently, however, the non-monetary incentives, and in particular, the interrelationship
between the monetary and non-monetary rewards have also been the subject of economic
analysis. The economic research on non-monetary sources of motivation that has been
carried out during the last two decades has mainly been focused on the importance of
other-regarding preferences. The cornerstone of this work is the observation that the
quality of interactions between principals and agents is affected by the degree to which
the relationship is characterized by trust, fairness and reciprocity; see e.g., Charness
(2004), Fehr, Gächter and Kirchsteiger (1997), Fehr, Kirchsteiger and Riedl (1993), Fehr,
Klein and Schmidt (2007), and Fehr and Schmidt (1999). Hence, it has been shown that
in employment relations employees respond to their employer’s generous wage policies
by reciprocating and putting forth additional effort. There is also some experimental
1
See chapter 5 in Baron and Kreps (1999) textbook.
2
evidence that introduction of monetary rewards may sometimes crowd-out intrinsic
motivation, and hence have unintended counterproductive consequences; see e.g.,
Gneezy and Rustichini (2000).
While there is much research on reciprocal behavior, work on non-monetary rewards
used by the principal to express trust is scarce. Two exceptions are Falk and Kosfeld
(2006) on the principal’s choice of autonomy provided to employees and Dickinson and
Villeval (2008) on the principal’s choice of monitoring intensity. Both studies examine
ex ante actions: the principal sends a signal of his trust to the agent before effort is
provided. Another important source of motivation in many workplaces is the feedback
agents receive ex post on their actions; see notably Eriksson, Poulsen and Villeval
(2009). Feedback is not only or necessarily related to the quantitative evaluation of the
employee’s performance. It can also, as in subjective performance evaluations, express
the employer’s satisfaction with the behavior of the employee.
Studies of how
employers value their employees, how they express it (if at all), and how this in turn
affects employee behavior and performance are rather thin on the ground.
And yet, people are not only motivated by what others do to them (other-regarding
preferences), but also what others think about them (self-regarding motives); see
Ellingsen and Johannesson (2007a and b).2
Agents derive utility from thinking of
themselves as good, skilled, and valuable (Benabou and Tirole (2002, 2006)), and
consequently have a desire for praise and social esteem; Ellingsen and Johannesson
(2007a). This contributes to explain why non-monetary job attributes matter in that
2
Ellingsen and Johannesson (2007b) show for example that anticipated verbal feedback from recipients
affects the decisions of dividers in a splitting game although the relationship is anonymous and one-shot.
Similarly, Xiao and Houser (2007) find that the willingness to avoid negative emotions expression through
written messages from the receivers promotes fair exchange in a one-shot dictator game. Dana, Cain and
Dawes (2006) show that many more subjects prefer exiting rather than playing a dictator game when the
recipients are informed about the choice faced by the dictator than when uninformed on this option.
3
people enjoy working in firms where managers provide recognition (Lazear and Shaw,
2007; see also Bewley (1996) on work morale). Indeed, employees value the attention
expressed by their employers and the good contact with them. For example, from a
social psychology perspective, Rhoades and Eisenberger (2002) provide evidence of the
importance of organizational support on employees; Webster et al. (2003) and Gaines et
al. (2005) show the importance of praise after a successful performance. In the same
vein, Dur (2008) proposes a theoretical model in which managers’ care is expressed
through both the wage level and socio-emotional resources and shows their
substitutability.
Our key hypothesis in this paper is that the expression of respect may be an important
non-monetary source of motivation due to the existence of esteem needs. Respect to
employees is signaled notably by the principal’s attention and the praise for the
employees’ effort. Following Ellingsen and Johannesson (2008), we model respect by
providing the principal with the possibility of expressing his approval of the agent’s
choice of effort through the use of symbolic rewards.3
The agent can reward the
expression of respect or sanction a lack of respect either through his choice of effort in
the subsequent period(s), or through the duration of the employment relationship. If the
employees value respect, this means that the employer can pay them with a combination
of monetary rewards and respect. Moreover, as emphasized by Ellingsen and
Johannesson (2007a), the employer can increase the value of respect by proving to be a
worthy audience. This means that the symbolic rewards sent by the employer have an
3
The experimental literature has so far investigated more the role of symbolic punishment than that of
symbolic rewards. See for example Masclet et al. (2003) on moral sanctions in a public good game. In a
field experiment with fishermen, Carpenter and Seki (2010) allow the participants to buy unhappy faces to
express their social disapproval to the rest of their group. This is different from our game since they
consider a public good game and players can only express disapproval. Our perspective also differs from
the studies of online feedback evaluation in electronic marketplaces. Indeed, these ratings aim at building
the sellers’ public reputation (see for example Bolton et al., 2004) whereas we are only interested in a
principal-agent bilateral relationship with no public display of respect.
4
influence on the employee if and only if the employer is perceived of as a respectable
person, that is, his intentions are good. This suggests that the expression of respect
should be costly to the employer. In particular, the symbolic rewards may have no value
in the eyes’ of the employee if the principal has chosen to offer a minimum wage level.
This paper addresses three sets of questions. First, do employers use costly symbolic
rewards and if so, are they complements or substitutes to wages? How are profits
affected by provision of symbolic rewards? Second, do employees value the respect
expressed by the employers? For given wages, does respect increase further effort and
the length of the relationship with the same employer? Third, to which extent is
employers’ use of symbolic rewards influenced by strategic considerations?
Needless to say, testing our hypothesis that respect is an important non-monetary source
of motivation would be very difficult by means of survey or registry data. We have
therefore designed a laboratory experiment based on a gift-exchange game that is played
repeatedly. The structure of the baseline treatment is inspired by Brown, Falk and Fehr
(2004). The first stage is a trading phase in which employers submit wage offers on the
market. The contractual offers can be public or private, i.e. employees and firms can be
identified with identification numbers that enable players to build long-term
relationships. In the second stage, the employees who have accepted an offer decide on
their level of effort. To allow employers to express respect to employees, we add a third
stage in which the employer can buy and assign symbolic rewards to her employee to
show her satisfaction. These symbolic rewards do not affect the employee’s payoff but
they are costly to the employer, and this is known from all the players. In addition, we
compare three market conditions: one in which there are the same number of employers
and employees on the market, one in which there are 8 firms and 12 employees (“excess
5
supply”), and one in which there are 12 firms and 8 employees (“excess demand”). This
manipulation of the market conditions allows us to measure whether the use of symbolic
rewards is affected by the market conditions and by strategic considerations. Indeed, if
employers pay more respect in the excess demand condition and less respect in the
excess supply condition, conditional on the same level of effort, this suggests that the
expression of approval is partly driven by strategic considerations. This would suggest
that employers use the expression of respect to be better able in attracting employees
when they have to compete with other firms, or that they pay less attention when
employees are easier to recruit on the market.
Our results show that a relatively important fraction of employers use costly nonmonetary rewards to express their praise of employees’ effort. The use of symbolic
rewards is associated with lower wages and higher profits. On the employees’ side, at
the individual level the impact of receiving symbolic rewards on the likelihood of
accepting an offer from the same employer than in the previous period is increased; at the
aggregate level, however, the average duration of the employment relationship is not
higher when the expression of respect is made possible. We also find that the use of
symbolic rewards is increased in the excess supply condition and decreased in the excess
demand condition.
This tends to show that employers are more likely to use less
symbolic rewards to express their satisfaction with the employees’ effort than for purely
strategic reasons to cope with competition on the labor market.
The remainder of this paper unfolds as follows. Section 2 set outs the design and
procedures of the experiment in more details and Section 3 gives the theoretical
predictions. The presentation of our findings is in Section 4. The fifth section offers a
discussion of our results and some concluding remarks.
6
2. THE EXPERIMENT
2.1. Experimental design
Our experiment is based on a 2x3 design, that is, it consists of two treatments, the
baseline treatment and the respect treatment, each being played under three different
conditions: a balanced labor market, excess supply or excess demand in the labor market.
Our baseline treatment is close to the design used by Brown, Falk and Fehr (2004) in
their incomplete contract condition with a possibility for employers and employees to
enter into long-term relationships. It consists of a two-stage gift-exchange game that is
played during twelve trading periods. In the first stage of each trading period in our
balanced labor market condition, ten firms and ten employees can contract on the labor
market during three minutes.4 The duration of this trading phase can be shortened if the
maximum number of contracts were concluded before the three minutes have elapsed.
An identification number is assigned to each firm and each agent that is kept constant
until the end of the game. This allows traders to build long-term relationships. Only
firms can submit contracts on the labor market; a worker is not allowed to make offers.
A contract offer consists of a wage, w, and a desired level of effort, ê, with w 
(0,1,…,100) and ê (1,2,…,10). A contract offer can be either public or private. Public
offers are submitted on the market and are made visible to all the employees and firms.
Private offers are addressed to a specific employee and cannot be observed by any other
4
A major difference with the design of Brown, Falk and Fehr (2004) (BFF, thereafter) is that instructions
are contextualized. We use notions such as employer, employee, wage, quality of work. This choice is
justified by the nature of our treatment manipulation (see details below). Other differences with our design
include the use of separate instructions for employers and employees in BFF, 15 trading periods instead of
12, ten workers and seven firms instead of ten workers and ten firms in our balanced market condition.
7
firm or employee.5
Irrespective of whether the offer is public or private, the
identification number of the firms who submit an offer is always made visible. In a
particular period, a firm can submit as many public and private offers as desired but it
cannot contract with more than one employee and employees can accept at most one
contract. The identification number of the employees who have not yet accepted an offer
is always kept visible to the firms. As soon as an employee accepts an offer, his
identification number disappears from the pool of available employees. All the offers
submitted by this firm disappear from the market and therefore cannot be accepted
anymore. The employees can observe all public offers submitted on the market and the
private offers that are addressed specifically to them. An employee cannot accept an
offer during the first 20 seconds. This time lag forces employees to observe the market
and to avoid precipitation in the acceptance of contract offers.
As soon as an employee has accepted the offer of a firm, in the second stage of the game
he chooses his actual level of effort e with e (1,2,…,10). It is common information that
the firm’s desired level of effort is not binding and that the employee’s actual effort may
differ from it. The effort cost function is convex and the cost schedule for the employees
(the same as in BFF (2004)) is displayed in Table 1.
Table 1. The cost of effort
Effort
Cost
1
0
2
1
3
2
4
4
5
6
6
8
7
10
8
12
9
15
10
18
At the end of the second stage, the firm is informed about the effort level actually chosen
by its employee, but not the other firms. Trading partners are informed on both the
firm’s and the employee’s payoffs.
5
On the design of games with public vs. private contracts with an identification of the traders, see also
Kirchsteiger, Niederle and Potters (2001).
8
Like in BFF (2004), the payoff of the firm is determined as follows:
F = 10e – w if a contract has been accepted, and 0 otherwise
(1)
The payoff of the employee is defined as follows:
E = w – c(e) if a contract has been accepted, and 5 otherwise
(2)
The amount of 5 can be interpreted as an unemployment benefit.
At the end of a period, all contracts are terminated. At the beginning of the next period a
new trading phase starts and, like in BFF (2004), no employee has a job and no firm has
an employee. Therefore, to continue a relationship a firm has to make a private offer to
the same employee as in the previous period and the employee has to choose this offer
among the available offers.
Our aim in this experiment is to analyze whether firms are willing to pay for expressing
respect through a positive feedback to their employees and whether employees value
receiving praise for their effort. The respect treatment is based on the baseline treatment,
except that a third stage is added after the firm observes her employee’s actual effort
level. In this third stage, the firm can send between 0 and 5 symbolic rewards to her
employee to “express her approval” and the employee is informed about the number of
symbolic rewards he has received from the firm. The symbolic rewards consist of raised
thumbs that usually represent satisfaction, approval or praise of somebody’s action (see
instructions in Appendix).6 Receiving thumbs does not modify the employee’s payoff.
In contrast, assigning symbolic rewards is costly to the firm, as each thumb assigned
6
In gladiatorial combats in the ancient Rome, a thumb up was usually considered a signal of approval for a
gladiator's life to be spared, although the interpretation is now contested. In medieval times, it has been
used to seal transactions. This gesture is today considered as a sign of praise or approval of good or welldone behaviour in most cultures in Europe, North America or China. In a cross-country survey about the
meaning of this gesture, Morris, Collett, Marsh and O'Shaughnessy (1979) mention the following answers:
« All right, A.O.K., !arriba! (Spain), bang on, champion (France), everything's fine, everything's fixed,
excellent, first class, fixe (Portugal), good luck, great, great stuff, I agree, I made it, it's a winner, it's in the
bag, kalo (Greece), O.K., ready to go, realy good, right on, solid, Spitze (Austria), spot on, success, superb,
tops, va bene (Italy), very good, victory, you are right, you've done well. »
9
costs one point. Indeed, paying for respect is more than simply expressing praise:
whereas the later may not cost anything (and therefore may be hypocritical), the former
requires some effort on the part of the person who pays respect. The payoff of the firm
in the respect treatment is determined as follows:
FR = 10e – w- c(s), if a contract has been accepted, and 0 otherwise
(3)
with s denoting the number of symbolic rewards assigned to the employee.
The payoff function of the employee remains the same as in (2). Employees know both
that the assignment of thumbs reduces the firm’s payoff and the cost of the thumbs. In
contrast, the number of thumbs bought by a firm is not common information in the
market: only the employee of the firm is aware of her decision. In all treatments, a
history box is displayed on the subjects’ screens, showing for each period, whether a
contract has been concluded and if so, the identification number of the co-contractor,
whether it is private or public, the contractual wage, the demanded level of effort, the
actual level of effort, and the number of thumbs given to the employee.
The use of symbolic rewards may express a sincere praise of the employee’s effort by the
firm, but it may also be used strategically to retain an employee and to prolong a more
profitable relationship. To capture this dimension, we manipulate the structure of the
labor market. We deviate from the balanced condition by varying the proportion of firms
and employees on the market. In the excess demand condition, 12 firms compete to hire
8 employees. In the excess supply condition, 12 employees compete to contract with 8
firms.
Each treatment has been played under the three conditions. Our hypothesis is
that if the firm uses symbolic rewards strategically to retain an employee, the use of
thumbs conditional on the same effort level should decrease (increased) in the excess
supply (demand) as compared to the balanced market condition.
10
2.2. Procedures
The experiment has been run at the Groupe d’Analyse et de Théorie Economique (CNRS,
University of Lyon), Lyon, France.
180 undergraduate students from the local
engineering and business schools participated in this experiment, after receiving an
invitation by the ORSEE software (Greiner, 2004). For each labor market condition, two
sessions were conducted in the respect treatment and one in the baseline treatment. Thus,
nine sessions in total have been run for a total of 1080 observations.
No subject
participated in more than one session.
The experiment was computerized using the REGATE software (Zeiliger, 2000). Upon
arrival, the subjects drew a computer tag from a bag and were randomly assigned to a
computer terminal. After the instructions were read aloud by the experimentalist, the
subjects answered a questionnaire to check that they understood the rules of the game
(see Appendix).
All questions were answered in private and oral communication
between the subjects was not allowed. Then the subjects played three practice periods
with only the trading phase of the game in order to become familiar on how to trade on
the market, but without revealing their intentions regarding the choice of effort or the use
of symbolic rewards.
During these periods, the subjects received a provisional
identification number. The practice periods did not give rise to any payoff. Once the
practice periods were completed, subjects received a new identification number that they
kept until the end of the experiment and the first period started.
A session lasted on average approximately 90 minutes including the payment of subjects.
On average the subjects earned €14.85, including a show-up fee of €5.
11
3. PREDICTIONS
3.1 Game-theoretical predictions
The subgame-perfect equilibrium of the finitely repeated game in the baseline treatment
is straightforward. In the second stage of the game, since contracts are incomplete any
employee should choose the minimum level of effort that minimizes its cost, i.e. e*=1.
Anticipating this behavior, any firm should offer the minimum feasible wage level,
w*=5. Indeed, since the unemployment benefit amounts to 5, an employee should accept
any contract offering at least w=5, whatever the desired level of effort. Since all the
employees are expected to behave selfishly, firms should be indifferent between
submitting private or public contract offers in the market. These predictions hold for
each period and therefore, there is no reason to expect long-term relationships to emerge.
These standard predictions are not modified in the respect treatment since expressing
respect is costly to the firms. Consequently, firms should never buy symbolic rewards.
The share of private contracts, the average duration of contractual relationships, the
average wage and the average effort level should be similar across treatments. When
there is excess supply on the labor market, the predictions are the same as when the
market is balanced. When there is excess demand of labor, the competition between
firms may motivate firms to offer a higher wage than in the baseline or excess supply
conditions for increasing their chance to employ a worker. However, in such a situation,
the employees still choose the minimum level of effort, e*=1, and therefore the firms
cannot offer a wage higher than w=10 because otherwise they would make a loss. As a
result, w*=10 is the equilibrium wage in this condition. This indicates that surplus is
captured by the employees, whereas in the other conditions it is captured by the firms.
Since the equilibrium effort is the same as in the other conditions, firms remain
12
indifferent between making private or public offers on the market. Nor is there any
reason for more long-term relationships to arise in this condition than in the others.
3.2 Behavioral predictions
We know from the literature on the gift-exchange game that the average behavior usually
deviates from the sub-game perfect equilibrium. BFF (2004) show that in the game
corresponding to our baseline treatment, if there are sufficiently many fair subjects, there
is an equilibrium where all the employees choose a level of effort higher than the
minimum effort in all periods except the last one and where only the truly fair subjects
choose a non-minimum effort in the last period of the game.7 They demonstrate that
since fair workers reciprocate to the offer of positive rents, the firms offer profitable rents
up to the last period and therefore, the perspective of receiving a rent even in the last
period disciplines the selfish workers who mimic the truly fair subjects up to the
penultimate period. This mechanism is facilitated by the possibility of making private
offers and of building long-term contracts. But in the last period of the game, the selfish
employees do not have reasons to dissimulate their type anymore. In summary, we
expect that in the presence of a sufficiently high proportion of socially-oriented subjects,
we should observe e>e*, w>w*, a positive share of private offers and an average duration
of employment relationships significantly higher than 1. These behavioral predictions
hold for both treatments and all conditions.
These behavioral predictions derive from the assumption that people care about what
others do. Indeed, according to this approach, a player’s utility depends not only on his
own payoff but also on the intentions and payoffs of others.
This explains why
employees may reciprocate a generous wage offer by exerting a non-minimum effort.
7
This prediction is based on the inequity aversion model of Fehr and Schmidt (1999).
13
Here we are interested in examining what happens when people also care about what
others think. We assume that people dislike looking selfish, especially if others behave
generously, and they take pride in being thought of as a valuable person. Following the
same demonstration as in Ellingsen and Johannesson (2007), our prediction is that the
search for social esteem and praise leads to the offer of altruistic wages by the prosocial
employers and to the choice of non minimum effort levels by the non-selfish employees.
The level of effort will be higher if the intentions of the principals are perceived as being
good but unlike in reciprocity-based models, employees who search for esteem will exert
a level of effort higher than 1 even when they receive the minimum wage. We also
predict that the level of effort chosen by the employees who search for esteem and praise
should be higher in the respect treatment than in the baseline treatment since the
employer has the possibility to express his praise formally. Employees may be also more
likely to build long-term relationships if they receive praise for their effort and if they
believe their employer is sincerely generous.
At the same time, in the respect treatment, if the firms believe that a sufficient share of
employees have a concern for social esteem, they may praise their employees by sending
them costly symbolic rewards when the latter reciprocate to a generous wage offer.
Symbolic rewards represent another way for employers to signal their prosocial type.
Therefore, conditional on the same wage and rent offered, the average level of effort, the
share of private contract offers and the average duration of the employment relationship
should tend to be higher than in the baseline treatment.
However, firms can also use costly symbolic rewards strategically up to the penultimate
period if i) the cost of thumbs is more than compensated for by the additional surplus
created by the employee’s effort compared with a situation where no respect is
14
expressed, and if ii) thumbs increase the willingness of a reciprocal employee to stay in
the same firm. Firms may also use symbolic rewards strategically as a partial substitute
for generous wages. However, those who play strategically should never send symbolic
rewards in the last period. Indeed, expressing respect in the last period reveals a sincere
motivation since there is no chance to continue the relationship further.
The various market conditions help in identifying the motivation of offering symbolic
rewards. If we observe that, conditional on the same effort level, firms express less
respect when there is excess supply and more respect when there is excess demand than
in the balanced market condition, this indicates that some employers use symbolic
rewards strategically to attract or retain employees.
4. RESULTS
Table 2 displays summary statistics on the choice of wages, effort and the use of
symbolic rewards by treatment and by condition.
Table 2. Summary statistics
Market
condition
Treatment
%
private
contracts
Wage
Desired
effort
Rent
Actual effort
Profit
Employee’s
payoffs
% contracts
with thumbs
Nb thumbs
if thumbs>0
Balanced market
Baseline
64.29
(48.13)
47.61
(13.18)
8.49
(1.96)
33.49
(10.70)
6.24
(3.68)
14.80
(30.23)
37.85
(9.96)
-
Respect
56.78
(49.64)
38.34
(14.91)
8.02
(2.23)
25.37
(11.74)
5.43
(3.16)
15.52
(21.24)
30.67
(10.61)
23.31
(42.37)
1.98
(1.11)
Excess demand
Baseline
41.38
(49.54)
75.38
(7.21)
9.47
(1.26)
58.73
(6.62)
7.56
(3.05)
0.25
(30.05)
63.10
(8.42)
-
15
Respect
57.29
(49.59)
53.91
(17.24)
8.52
(2.14)
39.65
(15.16)
5.69
(3.66)
2.47
(28.79)
45.35
(14.09)
20.83
(40.72)
2.40
(1.43)
Excess supply
Baseline
81.25
(39.24)
39.68
(20.45)
7.17
(2.92)
28.36
(15.34)
6.08
(3.55)
21.16
(19.42)
30.36
(14.34)
-
Respect
60.21
(49.08)
34.04
(20.05)
7.37
(2.73)
22.37
(16.16)
4.89
(3.63)
14.18
(26.87)
27.07
(16.24)
28.80
(45.40)
2.38
(1.41)
Average
total length
Nb observ.
Nb contracts
% contracts
1.84
1.57
1.51
1.41
1.96
1.80
120
112
93.52
240
236
98.33
144
87
60.42
288
192
66.67
96
96
100
192
191
99.48
Table 2 indicates that the percentage of private offers, wages, and rents offered by the
employers, and the effort exerted by the employees are higher than expected from
standard predictions. This simply confirms the evidence provided by several previous
gift-exchange experiments, and in particular by BFF (2004), showing that behavior does
typically deviate from the standard subgame perfect equilibrium. Interestingly, Table 2
also shows two puzzling results. First, firms do use symbolic rewards in all labor market
conditions, and especially where there is excess supply. Second, the average contractual
conditions for both parties look better in the baseline treatment when no symbolic
rewards are available. Indeed, the average wage and rent, the average employer’s profit,
and the average length of the employment relationship are lower in the respect treatment
than in the baseline. This is observed in all the labor market conditions. The following
subsections analyze these findings.
4.1. The use of symbolic rewards
Symbolic rewards and private contracts
We begin with looking at employers’ use of symbolic rewards and private offers.
According to the subgame perfect equilibrium, firms should never give symbolic rewards
and as they are indifferent between employees, they should only make public offers. A
first thing worth noting is that in the balanced market condition, a little over half, 64.29%
in the baseline treatment and 56.5 % in the respect treatment, of all offers are private. In
the baseline treatment, the private offers’ share of all contracts varies across labor market
conditions but when the opportunity to express respect by means of symbolic rewards is
16
available, the share is roughly the same under all three market conditions. This suggests
that employers are not indifferent between the employees on the market since they try to
attract particular employees.
The second important finding is that across conditions about a fourth (24.23%) of all
firms give at least one symbolic reward to their employee. Figure 1 shows how this
percentage varies across labor market conditions for all contracts and for private
contracts.
Probability of giving thumbs
40
34,78
34,33
35
30
28,8
28,18
All contracts
Private contracts
25
23,3
20,8
20
15
Balanced
Excess demand
Excess supply
Fig. 1. Use of symbolic rewards by market condition in the respect treatment
Figure 1 shows that symbolic rewards are more prevalent in connection with private
contracts: 32.6 per cent of all firms that offer private contracts use them. This indicates
that paying respect is less prevalent in anonymous and impersonal relationships.
It also shows that the proportion of firms giving thumbs varies by labor market
conditions; it is below average under excess demand and above when the number of
employees exceed the number of vacant jobs. This tends to reject the hypothesis that
17
employers use thumbs strategically; if this was the case we should have observed that
employers send less (more, respectively) symbolic rewards when it is easy (difficult,
resp.) to replace employees at low cost on the labor market, i.e. in the excess supply
condition (the excess demand condition, resp.). The average number of thumbs given is
2.24 for firms that use them. This average masks some differences between labor market
conditions; the average number of thumbs for givers is 1.98 in the balanced market
condition, 2.40 in the excess demand condition and 2.38 in the excess supply condition.
Symbolic rewards and effort
Having shown that firms make use of symbolic rewards, especially in private contracts,
we next examine how employees who receive thumbs in the respect treatment differ from
those who do not.
We first examine the relationship between exerting effort and
receiving thumbs. Figure 2 displays the relative frequency of firms distributing symbolic
rewards in each labor market condition for each of three categories of effort: a level of
effort lower than 4, a level of effort comprised in between 4 and 6, and a level of effort
higher than 6.
Relative frequency of firms giving thumbs
60
52,56
50
50
37,74
40
37,76
Balanced
Excess demand
Excess supply
30
23,73
20
11,54
10
1,4
0
3,3
0
effort <4
effort >3 and <7
effort>6
Actual effort
Fig.2. Relative frequency of firms distributing symbolic rewards by
category of effort and market condition
18
From Figure 2 we may note that employees who provide higher effort are more likely to
receive thumbs. In the balanced market condition, only 1.40% of firms give thumbs in
return for a level of effort lower than 4. This percentage rises to 23.73% when effort is
between 4 and 6 and to 37.74% for higher effort levels. The employees who are praised
have provided on average an effort of 7.56 whereas the average effort of those who do
not receive thumbs is 4.78. The corresponding values are 8.68 and 4.90 in the excess
demand condition and 7.82 and 3.71 in the excess supply condition.
Symbolic rewards and the length of employment relationships
One behavioral prediction is that an indirect effect of recognition of an employee’s effort
by provision of symbolic rewards is that it facilitates the creation of relational contracts.
The distribution of thumbs should then be associated with an increased probability of
continuing the employment relationship and longer contract lengths. Figure 3 displays
the relative frequency of firms distributing thumbs in each market condition for three
categories of length of the employment relationship (relationships of one period, two
periods, or three periods or more). And Table 3 displays the distribution of employment
relationship total length by treatment and market condition.
Realtive frequency of firms giving thumbs
45
38,89
38,71
40
35
33,33
31,58
30
25
20
20
19,12
20,75
21,62
20,69
Balanced
Excess demand
Excess supply
15
10
5
0
length 1
length 2
length 3 and more
Length of the employment relationship
Fig.3. Relative frequency of firms distributing symbolic rewards by
19
category of length of employment relationship and market condition
Table 3. Distribution of employment relationship total length by treatment and market
condition
Relationship length
Baseline
Respect
Baseline
Respect
Baseline
Respect
1 period
2 periods
Balanced market
46 (75.41%)
8 (13.11%)
121 (80.67%)
17 (11.33%)
Excess demand
53 (79.10%)
11 (16.42%)
117 (86.03%)
10 (7.35%)
Excess supply
38 (77.55%)
5 (10.20%)
75 (70.75%)
18 (16.98%)
3 periods or more
7 (11.48%)
12 (8%)
3 (4.48%)
9 (6.62%)
6 (12.24%)
13 (12.26%)
Figure 3 shows that in the balanced market condition, 20% of firms distribute thumbs
when they start a new relationship with an employee; this percentage remains at the same
level (20.69%) for a two-period relationship, but it reaches 33.33% in longer-term
relationships. This indicates that those firms that succeed in building relational contracts
(i.e. longer-term contracts with the same employee) are likely to be the same as those that
pay respect to their employees.
At the aggregate level, however, the opportunity to express respect does not increase the
prevalence of relational contracts.
Indeed, Table 2 indicates that the average total
duration of contracts in the respect treatment in balanced markets (1.57) is shorter than
that for the baseline treatment (1.84). And Table 3 shows that the distribution of total
durations looks very similar in the baseline and the respect treatment in balanced markets
(75.41% of the relationships in the baseline and 80.67% in the respect treatment last only
one period). The same pattern is also observed in the other market conditions.
Symbolic rewards, wages and profits
Table 4 displays the average wage, rent and profit as a function of the relationship length
and the distribution of symbolic rewards in the balanced market condition.
20
Table 4. Average wage, rent and profit as a function of the relationship length and the
distribution of symbolic rewards in the balanced market condition
Relationship length
1 period
2 periods
Wage
46.93 (19.79)
35.83 (13.92)
42.33 (11.72)
Rent
Baseline
29.57 (7.85)
34.47 (20.44)
Respect w/o thumbs
20.86 (10.22)
23.09 (11.07)
Respect with thumbs
23.23 (6.07)
28 (10.71)
Profit
Baseline
2.57 (27.14)
9.73 (37.86)
Respect w/o thumbs
3.83 (20.15)
18.09 (19.54)
Respect with thumbs
28.13 (10.02)
31 (8.67)
Note: standard deviations are in parentheses.
Baseline
Respect w/o thumbs
Respect with thumbs
42.18 (10.88)
31.84 (12.84)
36.80 (7.39)
3 periods or
more
All accepted
contracts
57.08 (6.90)
52.24 (11.24)
55.79 (12.64)
47.61 (13.18)
36.63 (15.01)
43.96 (13.17)
39.72 (4.86)
35.61 (8.92)
36.68 (11.96)
33.49 (10.70)
24.24 (11.64)
29.09 (11.39)
37.64 (15.94)
30.39 (15.66)
31.74 (6.72)
14.80 (30.23)
11.22 (22.04)
29.69 (8.88)
Table 4 shows that wages and rents increase with the length of the relationship
independent of whether or not firms distribute or not symbolic rewards to their
employees and that for longer relationships the difference between the baseline and the
respect treatment are much smaller. Interestingly, on the one hand we find that in the
respect treatment the firms who give thumbs are also those that pay higher wages and
rents to their employees; but on the other hand, compared with firms in the baseline
treatment even those firms that distribute symbolic rewards in the respect treatment pay
lower wages and rents to their employees than the firms in the baseline.
Table 4 also indicates that employers who make use of thumbs are also those who earn
higher profits.8
In the respect treatment, profits in the one-period and two-period
relationship are on average considerably higher as compared to especially the baseline
treatment but also relationships when thumbs are not given.
For relationships the
duration of which exceeds two periods, the differences between the baseline and the
respect treatment (with or without thumbs) are negligible. This suggests that firms are
8
Corresponding tables for the excess demand and excess supply conditions are in the appendix.
21
more likely to distribute thumbs when the employees allow them to earn higher profits;
i.e. when they choose a higher level of effort.
4.2. The determinants of decisions
Moving next beyond the bivariate relationships we considered above, we perform some
simple regression analyses of the decisions made by the employer and employee
subjects, respectively. We first analyze the determinants of the employers’ decision to
give symbolic rewards to their employee. We estimate random-effects panel probit
models in which the dependent variable is the decision to give thumbs. We consider the
incentive compatible contracts. We use random effects models since we observe several
decisions by the same employer. The independent variables include a dummy variable
for private contracts, the rent, the effort exerted by the employee, the difference between
the desired level of effort and the actual level, and two dummy variables capturing
various lengths of the employment relationship. We also include a time trend to account
for the evolution of behavior over time. The results of these regressions are displayed in
Table 5. The first column contains the estimates on pooled data for all market conditions
of the respect treatment, including dummy variables for the excess demand and the
excess supply conditions. The next three columns report estimates for each of the three
market conditions separately.
Table 5. Determinants of the employer’s probability to give symbolic rewards (random
effects panel probit models)
Conditions
Private offer
Rent
Effort provided
Diff: actual/desired effort
Excess demand
All conditions
0.413*
(0.228)
-0.021**
(0.010)
0.373***
(0.061)
-0.131**
(0.059)
-0.024
Balanced
1.180***
(0.425)
-0.078***
(0.027)
0.379***
(0.117)
-0.229*
(0.125)
-
22
Excess demand
0.519
(0.417)
-0.004
(0.018)
0.332***
(0.109)
-0.263*
(0.140)
-
Excess supply
-0.784
(0.515)
-0.026*
(0.016)
0.593***
(0.141)
-0.042
(0.098)
Excess supply
(0.350)
0.638*
(0.338)
-
-
-
Length of relationship:
2 periods
-0.531**
-0.934**
-0.832*
-0.033
(0.240)
(0.422)
(0.483)
(0.420)
3 periods or more
-0.921***
-0.643
-1.318**
-0.731
(0.269)
(0.431)
(0.524)
(0.550)
Period
-0.053*
-0.058
-0.038
-0.087
(0.030)
(0.051)
(0.062)
(0.063)
Gender
-2.155***
-1.082
-2.461**
-2.037***
(0.505)
(0.864)
(1.120)
(0.773)
N
601
233
190
178
Log likelihood
-222.180
-81.196
-63.816
-63.670
Wald Chi2
87.84
27.06
22.99
31.97
p>chi2
0.000
0.000
0.002
0.000
Note: Standard errors are in parentheses. *** means significant at the 0.01 level, ** at the 0.05 level, and *
at the 0.10 level.
First, Table 5 shows that the level of effort provided consistently and strongly increases
the likelihood that one or more thumbs are given. Giving thumbs is clearly associated
with praise for the employee’s effort. Second, the difference between the actual level of
effort and the desired effort carries the expected negative sign, although this variable is
not statistically significant in the excess supply condition. Third, when the relationship is
the outcome of a private offer this is also associated with a higher probability that a
symbolic reward is given.9 However, this is only statistically significant for the balanced
market condition. When the market is not balanced, firms give symbolic rewards
whatever the origin of the contract. Fourth, there is a negative relationship between
monetary and non-monetary rewards as the rent variable receives a negative coefficient,
albeit this is not significant in the excess supply condition. This suggests some degree of
substitutability between rent or wage and symbolic rewards.10 When firms have to
compete to recruit an employee, they may offer both high rents and non-monetary
rewards. When the bargaining power of the employees is lower, firms tend to substitute
9
Note the order of events: the employer’s decision whether to submit a private offer precedes her gift of
symbolic rewards.
10
The regressions deliver the same conclusions when wage is used instead of the rent variable.
23
symbolic to monetary rewards. Fifth, as can be seen from the first column of the table,
controlling for the level of the rent and the effort provided by the employee, there is little
difference between the labor market conditions. Table 5 indicates however that being
confronted with excess supply on the labor market leads firms to marginally increase
their probability to give thumbs. This suggests that in this condition firms do not use
symbolic rewards strategically. An interpretation is that employees are more willing to
exert effort in order to stay in the same firm and employers are more likely to praise their
employees; as seen in Table 3, the average duration of contracts is slightly higher in this
market condition than in the others. Table 5 also shows that in this condition only the
duration of the employment relationship does not reduce the probability to give symbolic
rewards, which again suggests that thumbs are not used strategically.
In the other
conditions, firms are more likely to give thumbs at the first match with an employee and
the probability to offer a thumb drops steeply with duration.
We turn next to the employer’s decision to make a private offer to the same employee.
In particular, we investigate whether paying respect is associated with the employers’
willingness to keep the same employee in the next period. We estimate two randomeffects probit models in which the dependent variable is the probability for an employer
to make a private offer to the same employee as in the previous period. The independent
variables include the effort provided by the employee and the difference between the
actual and the desired levels of effort in the previous period. We also include the number
of thumbs given by the employer to her employee in the previous period. We control for
the period and for each labor market condition. The first model considers the baseline
treatment and the second column the respect treatment. Table 6 displays the results of
these regressions.
24
Table 6. Determinants of the employer’s probability to make a private offer to same
employee as in the previous period (random effects panel probit models)
Treatment
Effort (t-1)
Baseline treatment
0.230***
(0.060)
0.001
(0.065)
-
Respect treatment
0.311***
(0.038)
Diff in effort (t-1)
0.009
(0.042)
Nb thumbs (t-1)
0.213***
(0.074)
Excess demand
-1.047**
0.181
(0.430)
(0.219)
Excess supply
2.440***
0.517**
(0.785)
(0.236)
Period
0.033
0.098***
(0.031)
(0.022)
Constant
-1.515
-2.928***
(0.604)
(0.379)
N
267
568
Log likelihood
-130.037
-227.078
Wald Chi2
44.49
173.41
p>chi2
0.000
0.000
Note: Standard errors are in parentheses. *** means significant at the 0.01 level, ** at the 0.05 level, and *
at the 0.10 level.
In the baseline treatment the decision to offer a contract to the same employee as in the
previous period is driven by the level of effort provided by the employee in the preceding
period. Under the excess demand condition, the employers are, presumably because of
the strong competition, less likely to give a private offer to the same employee. They
probably prefer to make more public offers to be more visible to employees on the
market. This is the opposite in the excess supply condition probably because the risk of
unemployment “disciplines” employees. When it is possible to give thumbs, effort plays
an important role as before. But not surprisingly, the number of thumbs given to the
employee in the previous period increases, ceteris paribus, the probability that the
employee will receive a private offer from the same employer. In that sense, paying
respect is associated with the willingness of some employers to build relational contracts.
The other side of the story is of course whether or not the employee accepts the offer.
We estimate the determinants of the employee’s probability to accept an offer from the
25
same firm as in the previous period by means of random effects panel probit models.
The first four models consider the respect treatment (first with pooled data, and next for
each labor market condition separately). The last model considers the baseline treatment.
The independent variables include the rent offered, the number of thumbs received in the
previous period, the length of the relationship with the same employer in the previous
period.
Two dummy variables account for the excess supply and excess demand
conditions. Table 7 displays the results of these regressions.
Table 7. Determinants of the employee’s probability to accept an offer from the same
firm as in the previous period (random effects panel probit models)
Respect
Treatment
All conditions
Wage
# of thumbs in t-1
Excess demand
Excess supply
Length
relationship t-1
of
0.032***
(0.005)
0.285***
(0.068)
-0.829***
(0.215)
0.602***
(0.207)
0.257***
(0.062)
Respect
Treatment
Balanced
condition
0.051***
(0.010)
0.394***
(0.142)
0.361***
(0.118)
Respect
treatment
Excess
demand
0.019**
(0.009)
0.422***
(0.113)
0.644***
(0.168)
Respect
treatment
Excess
supply
0.028***
(0.007)
0.076
(0.099)
0.124*
(0.074)
Baseline
treatment
All
conditions
0.032***
(0.005)
-1.452***
(0.290)
0.739***
(0.254)
0.058
(0.050)
Control for period
N
511
213
174
124
416
Note: Standard errors are in parentheses. *** means significant at the 0.01 level, ** at the 0.05 level, and *
at the 0.10 level.
The results given in Table 7 document that the probability that an employee accepts to
stay with the same employer is increasing in the wage offered. For a given wage, the
employee is also more willing to continue the relationship when she has received a
symbolic reward in the period before. Thus, with exception for excess supply condition,
the estimates imply that expressing respect contribute to longer relational contracts. In
the respect treatments, the duration of the relationship itself has an independent effect on
the likelihood that the employee will accept an offer from the same firm as in previous
26
periods. Excess demand (supply) in the market has a fairly large (negative and positive,
respectively) impact on the decision to remain with the same employer as in the previous
period.
5. DISCUSSION AND CONCLUSION
To be completed.
27
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Appendix
Average profits and relationship length; Excess Demand
Length
One period
2 periods
3 periods
4 periods or
more
No respect Respect
-2.73
(31.41)
5.29
(25.89)
21.33
(2.52)
22.33
(4.62)
-6.23
(25.99)
13.79
(24.36)
20.89
(28.27)
31.11
(20.17)
Respect
With thumbs
18.62
(14.52)
24.33
(14.14)
30.00
(7.07)
27.67
(8.09)
Average profits and relationship length; Excess Supply
Length
One period
2 periods
3 periods
4 periods or
more
No respect Respect
9.67
(16.75)
17.64
(21.34)
34.50
(7.74)
38.53
(5.13)
4.66
(22.82)
19.71
(25.40)
32.08
(26.77)
28.93
(27.80)
Respect
With thumbs
29.18
(21.69)
32.92
(26.83)
40.88
(12.73)
44.62
(13.34)
30
APPENDIX 1. Instructions for the balanced respect treatment (other instructions are
available upon request)
We thank you for participating in this experiment. At the beginning of this session, you will receive an
initial endowment of 5 Euros. During the course of this experiment, you can earn a further amount of
money by accumulating points. The amount of points that you gain during the experiment depends on your
decisions and the decisions of other participants. All the points that your will earn during the 12 periods of
this experiment will be summed and exchanged into Euros at the end of the experiment according to the
exchange rate of :
100 points = 4 Euros
At the end of the experiment, you will receive the amount that you earned during this experiment in
addition to your initial endowment. Your earnings will be paid in cash in a separate room.
There are two roles in this experiment : there are employers and employees. The role of each participant is
randomly allocated at the beginning of the experiment and each will keep the same role during the whole
experiment. The number of employers is the same as the number of employees.
All participants have received an identification number which they will keep for the entire experiment. You
will find your number on your screen.
Overview of each period
In each period, every employer can recruit one employee. The procedures are as follows.
1. Each period starts with a trading phase which lasts 3 minutes. During this phase, employers can
submit contract offers which can be accepted by employees. When submitting an offer, the
employer has to specify three things:
- which wage he offers
- which quality of work he desires
- and whether he wants to submit public offers to all employees or private offers to specific employees
only.
Offers can be accepted by employees at any time during the trading phase.
2. Following the trading phase, each employee who has concluded a trade chooses the actual quality
of his work.
3. After being informed on the quality of work chosen by his employee, the employer can decide to
express his approval to his employee by means of signs of approval.
4. Lastly, each participant’s earnings in the current period are determined.
Description of each stage
1. The trading phase on the market
Each period starts with a trading phase that lasts a maximum of 3 minutes. During this stage, each
employer can conclude a contract with an employee. In order to do so, he can submit as many offers as he
wishes.
Each employer can see the following screen:
31
Each employee can see the following screen:
In the top left corner of the screen, you can see the number of the current period and the time remaining in
32
this trading phase before the market closes.
How to submit an offer?
To submit an offer, the employer must indicate three elements on the left of the screen:
a) First, the employer specifies whether he wants to submit a private or a public offer.
- Public offers
The public offers are communicated to all participants in the market. All employees see all public offers on
their screens. A public offer can be accepted by any employee. An employer can also see all the public
offers submitted by all employers.
To submit a public offer, the employer has to click on the « public offer » field.
- Private offers
A private offer is submitted by an employer to one employee only. Only this employee is informed about
the offer and only this employee can accept the offer. No other employer or employee will be informed
about that offer.
To submit a private offer, the employer must click on the « private offer » field. After that he specifies the
identification number of the employee he wants to submit an offer to. Each employee keeps his
identification number throughout the whole experiment.
b) Once the employer has specified to whom he wants to submit an offer, he determines which wage
he offers. This wage can take any value between 0 and 100.
c) Finally, the employer determines the quality of work he desires. The quality of work can take any
value between 1 and 10.
After the offer is completely specified, the employer clicks on the « validate » button. As long as the button
is not clicked, the offer can be modified. After the employer has validated his offer, the offer is displayed
in bold in the list of offers available on the market.
Each employer can submit as many public and private offers as he wishes during each period as long as
there are employees available in the market. In the middle of the employer’s screens the identification
numbers of the remaining employees are kept visible.
All the public offers in the current trading phase are displayed on the left side of the employer’s and
employee’s screens. It is possible to see which employer has submitted an offer, which wage he has
offered, which quality of work he desires. All the employers have also an identification number that they
keep throughout the whole experiment.
The private offers are displayed in the middle of the screen. It is possible to see on the employer’s screen
which private offers he has submitted to specific employees, with their identification numbers, which wage
he has offered, and which quality of work he desires. One can see on the employee’s screen which private
offers he has been personnally submitted in the current period, specifying the employers’ identification
numbers, the wage offered and the desired quality of work.
How accept an offer?
On the left of their screen, the employees can see the remaining public offers and the private offers they
have received personnally. To accept an offer, the employee must click on the row in which the offer is
diplayed to highlight it, and then click on the button « I accept » to validate his choice. Each offer can be
accepted any time during the trading phase, after the first 20 seconds following the market opening.
In any given period, each employer and each employee can conclude at most one contract. Therefore, as
soon as one of his offers has been accepted, all the other offers submitted by this employer are
automatically cancelled. This employer is no longer allowed to submit other offers. The employer is
informed on his offer that has been accepted and on the identification number of the employee who has
accepted this offer.
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After 3 minutes have elapsed, the trading phase is over even if all the employers and all the employees
have not concluded a contract. If all the employees have concluded a contract before 3 minutes, the trading
phase is shortened.
2. Determination of work quality
Following the trading phase, the employees who have concluded a contract choose which quality of work
they supply to their respective employer. The quality chosen by the employe can differ from the quality
desired by the employer.
The quality of work has to be between 1 and 10. Each quality level is associated to a cost. The higher the
quality, the higher the cost to the employee, and the higher the employer’s earnings (before deduction of
wage), as indicated in the following Table:
Quality of work
Cost for the employee
Gain of the employer before
deduction of wage
1
0
10
2
1
20
3
2
30
4
4
40
5
6
50
6
8
60
7
10
70
8
12
80
9
15
90
10
18
100
The employer is informed on the quality of work actually supplied by his employee. No other employer or
employee will be informed about that decision.
3. Distribution of approval signs
After being informed on the quality of work actually supplied by their employee, the employers have the
possibility to express their approval to their employee by addressing him approval signs. These approval
signs are represented by raised thumbs, as indicated in the following screenshot:
The employer can send between 0 and 5 thumbs to his employee. The employee is informed on the number
of thumbs sent by his employer.
Receiving thumbs does not affect the employee’s payoff. They only aim at expressing the employer’s
approval.
Each thumb addressed to an employee costs 1 point to the employer. The employer must enter a value
between 0 and 5 and validate his decision.
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4. Calculation of payoffs
- The employer’s payoff in a given period:
• If the employer has not concluded a trade, the employer receives a payoff of 0 point.
• If the employer has concluded a trade, his payoff depends on the wage he has offered, the quality
supplied by the employee and the number of approval signs sent to the employee. The employer’s payoff is
therefore determined as follows:
Employer’s payoff = (10 * quality of work) - wage – cost of thumbs
- The employee’s payoff in a given period:
• If the employee has not concluded a trade, the employee receives a payoff of 5 points.
• If the employee has concluded a trade, his payoff is equal to the wage he has received minus the cost of
the quality of work supplied. The employee’s payoff is therefore determined as follows:
Employee’s payoff = wage - cost of the quality of work supplied
Note that it may happen that employers and employees can suffer losses in a given period. If any, the
losses will be deducted from your initial endowment of 5 Euros or from the gains realized in the other
periods.
Every one is informed of his own payoff and of the partner’s payoff at the end of the current period.
5. Enf of the period
A summary table appears on your screen and the screen of the participant you have concluded a contract
with, with the following information:
• the identification number of th employer or the employee
• the accepted wage
• the quality of work desired by the employer
• the quality of work supplied by the employee
• the number of thumbs sent by the employer to his employee
• your earnings for the current period
• the earnings of your partner for the current period, if any.
A new period starts utomatically.
6. Supplementary indicative question
At the beginning of each period, each employee can see an indicative question on this screen. He must
indicate if he is indifferent between all the employers or if he would prefer to receive a private offer from a
specific employer. In this case, he has to indicate the identification number of this employer.
The answer to this question is purely indicative and it is communicated to none of the other participants,
neither the employers, nor the employees. It has no influence on the offers received or on the payoffs.
---------To become familiar with the rules of this experiment, we invite you to read these instructions again and to
answer the questions that will be displayed on your screen.
Next, you will perform 3 trials of the trading phase only (i.e., without choosing the quality of work to
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supply nor the approval signs). During these trials no money can be earned. For these trials you will be
assigned a provisional identification number.
Following the 3 trials, the 12 periods that compose this experiment will start. The definitive identification
numbers will be assigned for the rest of the experiment.
Please note that communication between participants is strictly prohibited during the experiment.
Communication will lead to the exclusion from the experiment. In case you have any question, do not
hesitate to raise your hand and we will answer your question in private.
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