Shocking gift exchange

We study how a gift exchange labor market reacts to the occurrence of negative shocks. One-round shocks may hit either workers' wages or employers' earnings (via worker pro-ductivity). In our model, other-regarding preferences suffice to predict gift exchange and wages above the competitive level. Wage rigidity is predicted if we add wage illusion and loss aversion. Using a real-effort laboratory experiment, we find support for the model. When there are no shocks, there is gift exchange. After a wage shock we see strong nom-inal wage rigidity and no impact on workers' effort, as predicted. Rigidity is also ob-served after a productivity shock, but here we do observe increases in effort, especially at low wages. The latter is contrary to the model predictions and suggests that productiv-ity shocks alter gift-exchange patterns. We conclude that the wage rigidity often observed in the field can be explained by boundedly rational workers with social preferences. (c) 2021 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license ( http://creativecommons.org/licenses/by-nc-nd/4.0/ )

Automated summary

The research finds that in a gift exchange labor market, negative shocks to wages or productivity impact wage levels and worker effort, with social preferences playing a role in gift exchange and wage levels.