Classical and belief-based gift exchange models: Theory and evidence

We derive and test the predictions of three competing models gift exchange: Classical (CGE); Augmented (AGE) based on unexpected wage surprises; Belief-based (BGE) that uses belief hierarchies to formally model reciprocity guilt-aversion. Following Akerlof (1982), we also introduce signals typical wage, θw, effort level, θe, in similar firms. examine worker's optimal response exogenous variation w, a signal firm's expectations from worker, s. All predict exchange, however, AGE CGE with respect s, are rejected. The BGE successfully explains data all these respects. Gift exchange is underpinned by provide novel empirical evidence first order stochastic dominance second beliefs.