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Deferred Compensation and Gift Exchange: An Experimental Investigation into Multi-Period Labor Markets

Author

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  • Huck, Steffen

    (University College London)

  • Seltzer, Andrew

    (Royal Holloway, University of London)

  • Wallace, Brian

    (Royal Holloway, University of London)

Abstract

This paper examines the relationship between firms’ wage offers and workers’ supply of effort using a three-period experiment. In equilibrium, firms will offer deferred compensation: first period productivity is positive and wages are zero, while third period productivity is zero and wages are positive. The experiment produces strong evidence that deferred compensation increases worker effort; in about 70 percent of cases subjects supplied the optimal effort given the wage offer, and there was a strong effort response to future-period wages. We also find some evidence of gift exchange; worker players increased the effort levels in response to above equilibrium wage offers by a human, but not in response to similar offers by a computer. Finally, we find that firm players who are initially hesitant to defer compensation learn over time that it is beneficial to do so.

Suggested Citation

  • Huck, Steffen & Seltzer, Andrew & Wallace, Brian, 2004. "Deferred Compensation and Gift Exchange: An Experimental Investigation into Multi-Period Labor Markets," IZA Discussion Papers 1193, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1193
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    References listed on IDEAS

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    Cited by:

    1. Paul Hek & Daniel Vuuren, 2011. "Are older workers overpaid? A literature review," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(4), pages 436-460, August.

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    More about this item

    Keywords

    gift exchange; deferred compensation; pensions; experimental labor economics; personnel economics; incentives; shirking;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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