EXPLAINING GIFT‐EXCHANGE—THE LIMITS OF GOOD INTENTIONS

This paper explores the limitations of intention‐based social preferences as an explanation of gift‐exchange between a firm and a worker. In a framework with one self‐interested and one reciprocal player, gift‐giving never arises in equilibrium. Instead, any equilibrium in a large class of multistage games must involve mutually unkind behavior of both players. Besides gift‐exchange, this class of games also includes moral hazard models and the rotten kid framework. Even though equilibrium behavior may appear positively reciprocal in some of these games, the self‐interested player never benefits from reciprocity. We discuss the relation of these results to the theoretical and empirical literature on gift‐exchange in employment relations.     

GIFT EXCHANGE AND WORKERS' FAIRNESS CONCERNS: WHEN EQUALITY IS UNFAIR5

We study how different payment modes influence the effectiveness of gift exchange as a contract enforcement device. In particular, we analyze how horizontal fairness concerns affect performance and efficiency in an environment characterized by contractual incompleteness. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. We find that the use of equal wages elicits substantially lower efforts. This is not caused by monetary incentives per se because under both wage schemes it is profit‐maximizing for agents to exert high efforts. The treatment difference instead seems to be driven by the fact that the norm of equity is violated far more frequently in the equal wage treatment. After having suffered from violations of the equity principle, agents withdraw effort. These findings hold even after controlling for the role of intentions, as we show in a third treatment. Our results suggest that adherence to the norm of equity is a necessary prerequisite for successful establishment of gift‐exchange relations. (JEL: J33, D63, M52, C92, J41)     

Putting Behavioral Economics to Work: Testing for Gift Exchange in Labor Markets Using Field Experiments

Recent discoveries in behavioral economics have led scholars to question the underpinnings of neoclassical economics. We use insights gained from one of the most influential lines of behavioral research—gift exchange—in an attempt to maximize worker effort in two quite distinct tasks: data entry for a university library and door‐to‐door fundraising for a research center. In support of the received literature, our field evidence suggests that worker effort in the first few hours on the job is considerably higher in the “gift” treatment than in the “nongift” treatment. After the initial few hours, however, no difference in outcomes is observed, and overall the gift treatment yielded inferior aggregate outcomes for the employer: with the same budget we would have logged more data for our library and raised more money for our research center by using the market‐clearing wage rather than by trying to induce greater effort with a gift of higher wages.     

ON THE RELATIVE EFFICIENCY OF PERFORMANCE PAY AND NONCONTINGENT INCENTIVES

We report evidence from a large field experiment that compares the effectiveness of contingent and noncontingent incentives in eliciting costly effort for a large range of payment levels. The company with which we worked sent 7,250 letters asking customers to complete a survey. Some letters promised to pay amounts ranging from $1 to $30 upon compliance (contingent incentives), whereas others already contained the money in the request envelopes (noncontingent incentives). Compared to no payment, very small contingent payments lower the response rate while small noncontingent payments raise the response rate. As expected, response rates rise with the size of the incentive offered. The response rate in the noncontingent incentives rises more rapidly for low amounts of incentive, but then flattens out and reaches lower levels than under contingent payments. We discuss how the optimal policy regarding the use of each size and type of incentives crucially depends on firms’ objectives.     

Gifts and Gifting

The terms gift and gifting are rarely formally defined, but are associated with something given without receiving payment, often in the expectation of reciprocation and of changing the relationship with the recipient. Extensive prior work across a number of disciplines tends to focus on gifting as a process and shows a broad conceptualization of the gift construct to include actions as diverse as charitable giving, tipping, self‐gifting and volunteering, where relationship development and reciprocation are largely irrelevant. As a way to develop the area, two proposals are made: first, that gifting research should recognize two different types of gift, transactional and relational; and second, that the exchange paradigm and its underpinning social exchange theory should become central in developing understanding of relational gifting. The authors argue that empirical researchers may usefully revisit the relational paradigm, but by adopting a more quantitative, modelling approach, and the paper illustrates how this might be achieved.     

EXPORT‐PLATFORM FOREIGN DIRECT INVESTMENT

A poorly understood empirical phenomenon is export‐platform affiliate production (EP), particularly for sale in third countries rather than in the parent or host countries. We develop a three‐region model, with two identical large, high‐cost countries (collectively called North) and a small, low‐cost country (South). The large countries each have one firm. Our theory section analyzes the conditions under which one or both of these firms uses the South to produce for (a) export back to the parent (home‐country EP), (b) export to the other large country (third‐country EP), or (c) export to both (global EP). A free‐trade area between one of the northern countries and South can lead to the insider northern firm choosing home or global EP and the outsider firm choosing third‐country EP for a range of parameter values. Our empirical section shows the relevance of this outcome. Foreign manufacturing affiliates of US multinationals inside North America concentrate on home‐country EP while affiliates inside Europe concentrate on third‐country EP. (JEL: F12, F23)     

Inventory Sharing with Transshipment: Impacts of Demand Distribution Shapes and Setup Costs

We study a firm's optimal transshipment problem considering the impacts of setup costs for transshipment and demand distribution shapes. We assume that the demand follows a three‐point distribution, which changes from a degenerate distribution, to a unimodal distribution, and to a bimodal distribution as the demand shape parameter increases. We find that as the demand shape parameter increases, the optimal transshipment strategy changes from no transshipment to transshipment, and finally to no transshipment. The firm would use two‐way transshipment when the shape parameter is relatively small, while it would use one‐way transshipment when the shape parameter is relatively large. When the optimal strategy is one‐way transshipment, the transshipment direction depends on the contribution margin as well as the demand shape, when the difference between the two demand uncertainties is small. Our study of a dual‐channel retail system shows that the additional benefit of two‐way transshipment is negligible when there are many retail stores.     

Empathy wages?: Gratitude and gift exchange in employment relationships

Economists have argued that employers sometimes pay above-market premiums (efficiency wages) in order to attract, motivate, and/or retain valued personnel. Drawing on recent work examining reciprocity and gift exchange, this paper proposes the notion of “empathy wages,” in which the effect of the premium paid depends on the extent to which it elicits gratitude from recipients. We argue that a particular gift (monetary or otherwise) offered by an employer is likely to elicit more gratitude among “non-stars”: workers who are relatively disadvantaged and in the lower part of the performance distribution. In contrast to “stars,” “non-stars” are likely to compare the treatment they receive to the inferior opportunities or treatment they (might) have received outside of their present employment situation. Star workers, in contrast, are likely to believe that they are worth whatever they can command. The economic viability of such “empathy wages” thus depends on how much star versus non-star workers vary in gratitude, relative to how they differ in output and compensation. We explore a variety of data bearing on how much stars differ from non-stars in their respective output and earnings (in star contexts such as professional sports and real estate sales). We then review or reanalyze some prior studies on gift exchange, documenting that those who are relatively disadvantaged and/or low performers do appear more grateful (or inclined to reciprocate gifts) than stars. Indeed, the magnitude of the difference is sufficiently large that it could offset quite marked differences in productivity or quite small differences in compensation (both of which would make stars relatively more attractive to employers). We suggest some conditions under which gratitude-based employment systems are more likely to flourish in real-world settings, as well as some fruitful lines for future research on these topics.     

The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short‐Term Funds

We study European banks' demand for short‐term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank's auctions for one‐week loans, their main channel of monetary policy implementation. Our analysis provides a high‐frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks' bids reflect their cost of obtaining short‐term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a naïve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short‐term funding, we find that, for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short‐term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country‐of‐origin. The funding costs we estimate using bidding data are also predictive of market‐ and accounting‐based measures of bank performance, reinforcing the usefulness of “revealed preference” information contained in bids.     

EXCHANGE RATE POLICY AND ENDOGENOUS PRICE FLEXIBILITY

Most theoretical analysis of flexible versus fixed exchange rates takes the degree of nominal rigidity to be independent of the exchange rate regime choice itself; however, informal policy discussion often suggests that a credible exchange rate peg may increase internal price flexi‐bility. This paper explores the relationship between exchange rate policy and price flexibility, in a model where price flexibility itself is an endogenous choice of profit‐maximizing firms. A fixed exchange rate can affect the optimal degree of price flexibility by altering the volatility of nominal demand facing price‐setting firms. We find that a unilateral peg, such as a currency board, adopted by a single country, will increase internal price flexibility, perhaps by a large amount. On the other hand, when an exchange rate peg is supported by bilateral participation of all monetary authorities such as in a monetary union, price flexibility may actually be less than under freely floating exchange rates. Quantitatively, we find that the endogenous increase in price flexibility following a unilateral peg might be large enough that output volatility is no greater than it would be under a floating exchange rate regime. (JEL: F0, F4)     

A Model of the Consumption Response to Fiscal Stimulus Payments

A wide body of empirical evidence finds that approximately 25 percent of fiscal stimulus payments (e.g., tax rebates) are spent on nondurable household consumption in the quarter that they are received. To interpret this fact, we develop a structural economic model where households can hold two assets: a low‐return liquid asset (e.g., cash, checking account) and a high‐return illiquid asset that carries a transaction cost (e.g., housing, retirement account). The optimal life‐cycle pattern of portfolio choice implies that many households in the model are “wealthy hand‐to‐mouth”: they hold little or no liquid wealth despite owning sizable quantities of illiquid assets. Therefore, they display large propensities to consume out of additional transitory income, and small propensities to consume out of news about future income. We document the existence of such households in data from the Survey of Consumer Finances. A version of the model parameterized to the 2001 tax rebate episode yields consumption responses to fiscal stimulus payments that are in line with the evidence, and an order of magnitude larger than in the standard “one‐asset” framework. The model's nonlinearities with respect to the rebate size and the prevailing aggregate economic conditions have implications for policy design.     

Identifying Higher‐Order Rationality

Strategic choice data from a carefully chosen set of ring‐network games are used to obtain individual‐level estimates of higher‐order rationality. The experimental design exploits a natural exclusion restriction that is considerably weaker than the assumptions underlying alternative designs in the literature. In our data set, 93 percent of subjects are rational, 71 percent are rational and believe others are rational, 44 percent are rational and hold second‐order beliefs that others are rational, and 22 percent are rational and hold at least third‐order beliefs that others are rational.     

Measuring the Implications of Sales and Consumer Inventory Behavior

Temporary price reductions (sales) are common for many goods and naturally result in large increases in the quantity sold. Demand estimation based on temporary price reductions may mismeasure the long‐run responsiveness to prices. In this paper we quantify the extent of the problem and assess its economic implications. We structurally estimate a dynamic model of consumer choice using two years of scanner data on the purchasing behavior of a panel of households. The results suggest that static demand estimates, which neglect dynamics, (i) overestimate own‐price elasticities by 30 percent, (ii) underestimate cross‐price elasticities by up to a factor of 5, and (iii) overestimate the substitution to the no‐purchase or outside option by over 200 percent. This suggests that policy analysis based on static elasticity estimates will underestimate price–cost margins and underpredict the effects of mergers.     

Vacancy Referrals,Job Search,and the Duration of Unemployment: A Randomized Experiment

One goal of the Public Employment Service is to facilitate matching between unemployed job‐seekers and job vacancies; another goal is to monitor job search so as to bring search efforts among the unemployed in line with search requirements. The referral of job‐seekers to vacancies is one instrument used for these purposes. We report results from a randomized Swedish experiment where the outcome of referrals is examined. To what extent do unemployed individuals actually apply for the jobs they are referred to? Does information to job‐seekers about increased monitoring affect the probability of applying and the probability of leaving unemployment? The experiment indicates that a relatively large fraction (one‐third) of the referrals do not result in job applications. Information about intensified monitoring causes an increase in the probability of job application, especially among young people. However, we find no significant impact on the duration of unemployment.     

THE WELL‐BEING OF THE ELDERLY AND WAGE ARREARS IN RUSSIA

About one‐third of households with elderly were not paid their wages during the mid‐1990s in Russia. Applying matching estimations to a nationally representative survey, the study shows that wage arrears had detrimental effects on the well‐being of the elderly in these families. Salaries in households with wage arrears dropped by almost two‐thirds, income fell by more than one‐third, and poverty doubled. Behavioral responses were only partly effective. The net revenue loss amounted to five‐sixths of the wage shock for men, and nine‐tenths of the wage shock for women. The elderly cut back on food expenses by reducing food purchases and adjusting their diet towards cheaper calories, economising on expenses equal to around one‐quarter of the wage reduction. Caloric and protein intakes dropped, although less than income, and the nutritional content of food consumption with regard to vitamins and minerals deteriorated. Wage arrears worsened male health more than female health, even though the decline in income was comparable. Functional limitations rose by 8% for men and 3% for women, and self‐rated health declined by 2.5% for men and 0.5% for women. Old‐age men with arrears were almost twice as likely to die before the next survey round, and functional limitations of surviving men rose by more than 10%. By contrast, there was no impact on the next round's health status of old‐age women. A rich data set is used to discount alternative explanations, including feedback from health to income, other economic factors, health service access, health behavior, and environmental conditions. (JEL: I12, I30, J14, J30)     

Improving Staff Performance through the Use of Task Checklists

Analysis of a checklist system suggested that it may be a useful method of improving staff performance. Three features were considered important components of a checklist system: task definitions, recording responses on checklists, and periodic supervisor review. A checklist system incorporating these features was developed for an administrative staff in a large instructional system. A multiple-baseline across-subjects design and one reversal were used with three small groups of front-line staff, whose task completion was determined by permanent products left by the tasks. The percent of tasks completed improved by 28.8% when the checklist system was in effect. This study indicated that checklists may be a worthwhile method of managing worker performance.     

The Retail Space‐Exchange Problem with Pricing and Space Allocation Decisions

We consider retail space‐exchange problems where two retailers exchange shelf space to increase accessibility to more of their consumers in more locations without opening new stores. Using the Hotelling model, we find two retailers’ optimal prices, given their host and guest space in two stores under the space‐exchange strategy. Next, using the optimal space‐dependent prices, we analyze a non‐cooperative game, where each retailer makes a space allocation decision for the retailer's own store. We show that the two retailers will implement such a strategy in the game, if and only if their stores are large enough to serve more than one‐half of their consumers. Nash equilibrium for the game exists, and its value depends on consumers’ utilities and trip costs as well as the total available space in each retailer's store. Moreover, as a result of the space‐exchange strategy, each retailer's prices in two stores are both higher than the retailer's price before the space exchange, but they may or may not be identical.     

Reputation in Continuous‐Time Games

We study reputation dynamics in continuous‐time games in which a large player (e.g., government) faces a population of small players (e.g., households) and the large player's actions are imperfectly observable. The major part of our analysis examines the case in which public signals about the large player's actions are distorted by a Brownian motion and the large player is either a normal type, who plays strategically, or a behavioral type, who is committed to playing a stationary strategy. We obtain a clean characterization of sequential equilibria using ordinary differential equations and identify general conditions for the sequential equilibrium to be unique and Markovian in the small players' posterior belief. We find that a rich equilibrium dynamics arises when the small players assign positive prior probability to the behavioral type. By contrast, when it is common knowledge that the large player is the normal type, every public equilibrium of the continuous‐time game is payoff‐equivalent to one in which a static Nash equilibrium is played after every history. Finally, we examine variations of the model with Poisson signals and multiple behavioral types.     

Performance of Cellular Bucket Brigades with Hand‐Off Times

A cellular bucket brigade is a way to coordinate workers along an aisle with work content on both sides. Each worker in a cellular bucket brigade works on one side of the aisle when he proceeds in one direction, and he works on the other side when he proceeds in the reverse direction. Although the cellular bucket brigade eliminates the unproductive walk‐back, it requires more hand‐offs to assemble a product than a traditional (serial) bucket brigade. These hand‐offs may waste significant production capacity as each of them requires an exchange of work, which can be complicated and time‐consuming in practice. This motivates us to investigate the impact of hand‐off times on the cellular bucket brigade's performance. We identify sufficient conditions to ensure no workers are idle in the long run and for the system to self‐balance in a model with hand‐off times. Our results suggest that even with significant hand‐off times, the cellular bucket brigade can remain substantially (about 50%) more productive than the traditional bucket brigade especially if the team size is small and the workers’ work velocities are close to their walk velocity.     

Size,Skill and Sorting

Abstract. The rise in inequality between the 1970s and the 1990s and the persistent gap in pay between large and small employers are two of the most robust findings in the study of labor markets. Mainstream economists focus on differences in observable and unobservable skills to explain both the overall rising inequality and the size–wage gap. In this paper we model how increasing returns to skill can affect the size–wage gap both with constant sorting and with size‐biased, skill‐biased technological change (e.g. if large firms always had access to computers, but small firms gained access to computers with the rise of affordable personal computers). We analyze the Current Population Surveys from 1979 to 1993 to determine whether large and small employers are converging in terms of mean wages (the employer size–wage effect), wage structures by occupation and education, characteristics of employees, and wage structures by region. We find mixed evidence of convergence and no consistent support for any single version of human capital theory.