General Information
Thank you for being part of our research. You will be participating in a study of labor
markets. If you read these instructions carefully you may earn a significant sum of
money.
Each of you will be randomly assigned to one of two groups: “Managers” and
“Employees.” Whether you are a manager or employee is noted at the top of your record
sheet.
Each market period will have three stages:

Stage 1: The managers assign wages to the employees. The manager records the
wage assigned to his or her employee(s) on the record sheet provided. A monitor
will record the wage chosen by each manager.

Stage 2: The monitor will record (on the employee’s record sheet) the wages
received by the employee. The employee then chooses the amount of work to
provide.

Stage 3: The monitor informs each manager about the amount of work provided
by his or her employee(s).
As an employee, your income depends on the wage received and the amount of work you
provide. As a manager, your income depends on the wages paid and the amount of work
provided to you. Details for computing employee and manager earnings will be provided.
Please record (on your record sheet) the wage in each period and the amount of work
chosen. After recording this information you will then calculate the income you have
earned. Once everyone has calculated and recorded their income, the first period of the
labor market will be over. Over the course of the session, you will not be matched with
the same person for two consecutive periods and will not be matched with the same
person more than twice in total. In addition, you will not know with whom you have been
matched in any of the periods. Your total income for participating in this market will be
the sum of the earnings in each of the ten periods.
1
How the Labor Market Works
1. At the beginning of each period we will open the labor market. In Stage 1 each
manager chooses a wage for his or her employee(s) and records the wage on the record
sheet. Employees receiving a wage must accept the wage they have been assigned,
forming a labor contract with the manager. Some workers will not receive a wage
meaning that they are unemployed. Workers who do not receive a wage will receive a
fixed unemployment payment. Workers who will receive wages (versus those who are
unemployed) are determined randomly at the start of today’s session.
2. A monitor will write the wage given to each employee on his or her record sheet. The
monitor will write a “U” on the record sheet for all workers who are unemployed.
3. No manager will know the identity of the employees with whom s/he has been
paired, and no employee will know the identity of the manager.
4. After all wages have been communicated to each employee Stage 2 begins. Employees
who have received a wage choose an amount of work to provide and record it on the
record sheet.
5. In Stage 3 a monitor will write the amount of work provided on the manager’s record
sheet. Both managers and employees can then compute the earnings for the period.
Employees should not tell anyone what amount of work they have chosen and managers
should not tell anyone about the work level of their employees.
2
How Do Employees Calculate Their Income in Each Period?
1. Employee income in Experimental Dollars will be determined by the following
formula:
Employee Income:
If Employed = 100 – Amount of Work Provided + (Wage * 5)
If Unemployed = 70
2. If you receive a wage, you determine the amount of work by choosing a number from
0 to 100. The lowest amount of work you can choose is 0, 1 is a slightly higher amount,
and so on up to 100, which is the highest amount. If you are unemployed, you do not
choose an amount of work and you will receive an income of 70.
3. The higher the amount of work that you choose, the better it is for the manager. That
is, the higher the number you choose the higher the manager’s income.
4. The higher the amount of work you choose, the higher your work-related costs.
3
How Do Managers Calculate their Income in Each Period?
1. Manager income in Experimental Dollars will be determined by the following formula
for employed workers:
Manager Income = 100 – Wage + (Amount of Work Provided * 5)
2. You determine the wage by choosing a number from 0 to 100. The lowest wage you
can choose is 0, 1 is a slightly higher amount, and so on up to 100, which is the highest
amount.
3. The higher the wage that you choose, the better it is for the employee. That is, the
higher the number you choose the higher the employee’s income.
4. The higher the wage you choose, the higher your costs.
4
Practice Exercises
Employee Income = 100 – Amount of Work Provided + (Wage * 5)
Manager Income = 100 – Wage + (Amount of Work Provided * 5)
1. Assume that a manager assigns a wage of 80 experimental dollars to the employee. At
the second stage of the period, the employee chooses an amount of work of 20.
What is the income for the employee and for the manager?
Employee’s Income =__________ Experimental dollars
Manager’s Income
=__________ Experimental dollars
2. Assume that a manager assigns a wage of 80 to the employee. At the second stage of
the period, the employee chooses an amount of work of 90.
What is the income for the employee and for the manager?
Employee’s Income =__________ Experimental dollars
Manager’s Income
=__________ Experimental dollars
3. Assume that a manager assigns a wage of 30 experimental dollars to the employee. At
the second stage of the period, the employee chooses an amount of work of 80.
What is the income for the employee and for the manager?
Employee’s Income =__________ Experimental dollars
Manager’s Income
=__________ Experimental dollars
4. Assume that a manager assigns a wage of 30 to the employee. At the second stage of
the period, the employee chooses an amount of work of 10.
What is the income for the employee and for the manager?
Employee’s Income =__________ Experimental dollars
Manager’s Income
=__________ Experimental dollars
5
During the experiment your income will be calculated in “Experimental dollars,” which
will be converted into real dollars at the rate of:
250 Experimental Dollars = $1
In addition, you will receive a $6 payment for showing up for the experiment on time.
There will be a total of 10 market periods. Workers who are unemployed will remain
unemployed for the first three (3) market periods after which there will be opportunities
for them to work.
Your total earnings for participating in the experiment will be the sum of your earnings in
each of the ten market periods plus the $6 participation fee. You will be paid privately at
the conclusion of the experiment.
Are there any questions?
6
EMPLOYEE RECORD SHEET
ID#____________
Employee Income = 100 – Amount of Work Provided + (Wage * 5)
Period 1
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 1 __________
Period 2
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 2 __________
Period 3
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 3 __________
Period 4
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 4 __________
Period 5
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 5 __________
Period 6
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 6 __________
Period 7
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 7 __________
1
ID#____________
Employee Income = 100 – Amount of Work Provided + (Wage * 5)
Period 8
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 8 __________
Period 9
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 9 __________
Period 10
Your Wage ____________
Your Work Amount _____________
Your earnings for Period 10 __________
2
MANAGER RECORD SHEET
ID#____________
Manager Income = 100 – Wage + (Amount of Work Provided * 5)
Period 1
Wage Paid ____________
Amount of Work _____________
Your earnings for Period 1 __________
Period 2
Wage Paid ____________
Amount of Work _____________
Your earnings for Period 2 __________
Period 3
Wage Paid ____________
Amount of Work _____________
Your earnings for Period 3 __________
Announcement for Second Employee:
Managers will now have the opportunity to employ the previously unemployed. Now
managers can employ two employees, one previously employed worker (Employee A)
and one previously unemployed worker (Employee B).
Manager’s Income:
The structure of manager’s income is similar to before, but now the average work
provided by two employees will determine the manager’s income.
Manager's Income
= (Average Work) * 5 + 100 - Wage
= (EmployeeA Work + EmployeeB Work) * ½ * 5 + 100 - Wage
As with the workers you have been hiring previous to this, you determine the wage by
choosing a number from 0 to 100. The higher the wage that you choose, the better it is for
the employees. The higher the wage you choose, the higher your costs.
The only restriction is that managers must offer the same wage to both workers.
Employee’s Income:
Income for employees will be calculated just as before, but now no one will be
unemployed.
Employee income = (Wage * 5) + 100 – Amount of Work Provided
Just as before, you determine the amount of work by choosing a number from 0 to 100.
The higher the amount of work that you choose, the better it is for the manager. The
higher the amount of work you choose, the higher your work-related costs.
Note that this income schedule is the same for both previously employed and previously
unemployed workers. The employee’s income depends only on the wage offer and his or
her own work choice and not the work choice of the other employee.
Practice Exercises (part 2)
Employee Income = (Wage * 5) + 100 – Amount of Work Provided
Manager's Income = (Average Work) * 5 + 100 - Wage
= (EmployeeA Work + EmployeeB Work) * ½ * 5 + 100 - Wage
1. Assume that a manager assigns a wage of 70 experimental dollars to the employees. At
the second stage of the period, a previously employed worker (Employee A) chooses an
amount of work of 20 and a previously unemployed worker (Employee B) chooses an
amount of work of 80.
What is the income for the employees and for the manager?
Employee A income
=__________ Experimental dollars
Employee B income
=__________ Experimental dollars
Manager’s Income
=__________ Experimental dollars
2. Assume that a manager assigns a wage of 60 experimental dollars to the employees. At
the second stage of the period, Employee A chooses an amount of work of 40 and a
Employee B chooses an amount of work of 20.
What is the income for the employees and for the manager?
Employee A income
=__________ Experimental dollars
Employee B income
=__________ Experimental dollars
Manager’s Income
=__________ Experimental dollars
MANAGER RECORD SHEET
ID#____________
Manager's Income = (Average Work) * 5 + 100 - Wage
= (EmployeeA Work + EmployeeB Work) * ½ * 5 + 100 - Wage
Period 4 Wage Paid ____________
Work amount Employee A ________
Employee B ________
Total Earnings Period 4 _____________________
Period 5 Wage Paid ____________
Work amount Employee A ________
Employee B ________
Total Earnings Period 5_____________________
Period 6 Wage Paid ____________
Work amount Employee A ________
Employee B ________
Total Earnings Period 6 _____________________
Period 7 Wage Paid ____________
Work amount Employee A ________
Employee B ________
Total Earnings Period 7 _____________________
Period 8 Wage Paid ____________
Work amount Employee A ________
Employee B ________
Total Earnings Period 8 _____________________
MANAGER RECORD SHEET
ID#____________
Manager's Income = (Average Work) * 5 + 100 - Wage
= (EmployeeA Work + EmployeeB Work) * ½ * 5 + 100 - Wage
Period 9 Wage Paid ____________
Work amount Employee A ________
Employee B ________
Total Earnings Period 9 _____________________
Period 10 Wage Paid ____________
Work amount Employee A ________
Employee B ________
Total Earnings Period 10 _____________________
MATCHING SHEET
Period
M1
E#
E#
M2
E#
M3
E#
M4
E#
M5
E#
M6
E#
M7
E#
1
13
11
9
7
5
3
1
2
11
9
7
5
3
1
13
3
9
7
5
3
1
13
11
4
7
8
5
6
3
4
1
2
13
14
11
12
9
10
5
5
6
3
4
1
2
13
14
11
12
9
10
7
8
6
3
4
1
2
13
14
11
12
9
10
7
8
5
6
7
1
2
13
14
11
12
9
10
7
8
5
6
3
4
8
13
14
11
12
9
10
7
8
5
6
3
4
1
2
9
11
12
9
10
7
8
5
6
3
4
1
2
13
14
10
9
10
7
8
5
6
3
4
1
2
13
14
11
12