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The influence of potential on wages and effort

Author

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  • Gary Bolton

    (University of Texas at Dallas)

  • Peter Werner

    (University of Cologne)

Abstract

We investigate how employee potential influences wage offers and effort exertion in a gift exchange experiment. In particular, we test if gift exchange based on a commonly accepted norm for wage differentiation can emerge in a setting where the wage demands of agents are heterogeneous. We also analyse how communication by principals responds to the unequal wage demands and how it influences agents’ decisions about working effort in the presence of varying degrees of bargaining power. We find that differences in productivity and the resulting entitlements lead to differentiation in wages. High productivity agents are offered substantially higher wages than low productivity agents. Results from a control experiment suggest that a large part of this wage markup is related to the future productivity potential of high performers. At the same time, unequal wage schemes do not substantially crowd out effort exertion: we observe no strong detrimental effects from disadvantageous relative wage positions. Certain communication patterns significantly influence effort exertion.

Suggested Citation

  • Gary Bolton & Peter Werner, 2016. "The influence of potential on wages and effort," Experimental Economics, Springer;Economic Science Association, vol. 19(3), pages 535-561, September.
    • Handle: RePEc:kap:expeco:v:19:y:2016:i:3:d:10.1007_s10683-015-9453-0
    DOI: 10.1007/s10683-015-9453-0
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    3. Hopp, Daniel & Süß, Karolin, 2024. "How altruistic is indirect reciprocity? — Evidence from gift-exchange games in the lab," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 108(C).
    4. Sophie Cêtre & Max Lobeck, 2023. "Principal’s distributive preferences and the incentivization of agents," Experimental Economics, Springer;Economic Science Association, vol. 26(3), pages 646-672, July.
    5. Lan Guo & Theresa Libby & Xiaotao (Kelvin) Liu & Yu Tian, 2020. "Vertical Pay Dispersion, Peer Observability, and Misreporting in a Participative Budgeting Setting," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 575-602, March.
    6. Cardella, Eric & Roomets, Alex, 2022. "Pay distribution preferences and productivity effects: An experiment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 96(C).
    7. Anat Bracha, 2017. "Relative pay, effort, and labor supply," IZA World of Labor, Institute of Labor Economics (IZA), pages 367-367, June.
    8. Anat Bracha, 2016. "Relative pay, productivity, and labor supply," Current Policy Perspectives 17-2, Federal Reserve Bank of Boston.
    9. Werner, Peter, 2024. "On common evaluation standards and the acceptance of wage inequality," Games and Economic Behavior, Elsevier, vol. 145(C), pages 137-156.

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    More about this item

    Keywords

    Communication; Entitlements; Fairness norms; Gift exchange; Relative wages;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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