Scandinavian Working Papers in Economics
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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 1999:13:
Reciprocity and Wage Undercutting

Martin Dufwenberg ()

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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