The Effect of Reciprocity and Wages on Effort in Skill-Based and Non-Skill-Based Settings

• In Event: Incentives and Behavior

Abstract

Flat-wage contracts, where pay is not formally linked to performance, motivate effort using a reciprocal “gift exchange” between workers and firms. While flat-wage contracts are prevalent in many settings where productivity is strongly related to worker skill, the moderating effect of being in a skill-based setting has not been examined. This study examines if the effectiveness of reciprocity-based flat-wage contracts differs between skill-based and non-skill-based settings. My experimental results suggest that high skill workers suffer from an endowment effect and their effort is less responsive to wages than workers in equally productive non-skill-based settings, absent reciprocity concerns. However, this effect is reversed in the presence of reciprocity concerns. High skill workers’ effort is more responsive to wages than workers in equally productive non-skill-based settings when reciprocity is salient. My results contribute to a better understanding of the effectiveness of flat-wage contracts for skill-based positions.

Author

• Jeremy Douthit, University of Arizona