Do Market Conditions Affect Gift Exchange? Evidence from Experimental Markets with Excess Supply and Excess Demand

We study whether people’s behavior in unbalanced gift exchange markets with repeated interaction are affected by whether they are on the excess supply side or the excess demand side of the market. Our analysis is based on the comparison of behavior between two types of experimental gift exchange markets, which vary only with respect to whether first or second movers are on the long side of the market. The direction of market imbalance could influence subjects’ behavior, as second movers (workers) might react differently to favorable actions by first movers (firms) in the two cases. While our data show strong deviations from the standard game-theoretic prediction, we find mainly secondary treatment effects. Wage offers are not higher when there is an excess supply of firms, and workers do not respond more favorably to a given wage when there is an excess supply of labor. The state of competition does not appear to have strong effects in our data. We also present data from single-period sessions that show substantial gift exchange even without repeated interactions. Contact: Jordi Brandts, Instituto de Análisis Económico (CSIC), Barcelona ([email protected]); Gary Charness, Dept. of Economics, UCSB ([email protected]). This paper is part of the EU-TMR Research Network ENDEAR (FMRX-CT98-0238), and this research was undertaken while Charness was affiliated with Universitat Pompeu Fabra, Barcelona. The authors thank Isabel Busom, David Cooper, Guillaume Fréchette, Philippe Polomé, Jim Warnicke, and Shmuel Zamir for helpful comments, Brit Grosskopf and Carles Solà for their help in running the experiments and David Rodríguez for very able research assistance. Financial support from the Spanish DGCICYT (PB93-0679, PB940663-C03-01 and PB98-0465) is gratefully acknowledged. Charness also gratefully acknowledges support from the MacArthur Foundation.