Research Papers in Economics, Department of Economics, Stockholm University
Reciprocity and Wage Undercutting
Abstract: It is well-documented that employers refuse to hire
workers who offer their services at less than the prevailing wage. The
received explanation is that workers are motivated by reciprocity¾ they
desire to reward kindness and punish hostility. To refuse an outsider’s
under-bid is viewed as a kind choice that is met with good effort; a low
wage is viewed as an insult that is met with shirking. We have developed a
general theory of reciprocity which in this paper is applied to a
wage-setting game played by an employer and two workers. We show that when
workers are motivated by reciprocity, equilibrium behaviour accords well
with the aforementioned stylized facts.
Keywords: Reciprocity; wage underbidding; unemployment; (follow links to similar papers)
JEL-Codes: D63; E24; J41; (follow links to similar papers)
17 pages, November 4, 1999
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