Do Market Conditions Affect Gift Exchange? Evidence from Experimental Markets

We study whether behavior in experimental gift-exchange markets with repeated interaction is affected by market conditions. One issue we consider is the impact of competitive imbalance, by varying whether there is an excess supply of firms or an excess supply of workers in the market. Workers might react differently to high wage offers in the two cases, as it may seem that firms are ‘forced to be generous’ by competitive pressures when there are excess firms. Our second issue concerns the effect of requiring a minimum wage, another sense in which a firm may seem ‘forced to be generous’. We impose a minimum wage in the market with an excess supply of workers, and study the overall effect on wages and productivity. While our data show strong deviations from the standard game-theoretic prediction, the patterns of behavior are not fully consistent with either kindness-based models of positive reciprocity or models of distributional utility. The state of competition does not appear to have strong effects in our data; however, there is some evidence of lower productivity when a minimum wage is imposed. Finally, 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, David de Meza, Ernst Fehr, Guillaume Fréchette, Philippe Polomé, Jim Warnicke, Shmuel Zamir, and two anonymous referees 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, PB94-0663-C03-01 and PB98-0465) is gratefully acknowledged. Charness also gratefully acknowledges support from the MacArthur Foundation.