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| Author: | Dufwenberg, M. Kirchsteiger, G. |
| Title: | Reciprocity and wage undercutting |
| Journal: | European Economic Review
2000 : MAY, VOL. 44:4-6, p. 1069-1078 |
| Index terms: | Pay Unemployment Models |
| Language: | eng |
| Abstract: | It is well documented that employers refuse to hire workers who offer their services at less than the prevailing wage. The received explanation is that workers are motivated by reciprocity - they desire to reward kindness and punish hostility. To refuse an outsider's underbid is viewed as a kind choice that is met with good effort, low wage is viewed as an insult that is met with shirking. This paper developes a general theory of reciprocity which is applied to a wage-setting game played by an employer and two workers. It is shown that when workers are motivated by reciprocity, equilibrium behaviour accords well with the aforementioned stylized facts. |
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