Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2015:10: Backscratching in Hierarchical Organizations

Valeria Maggian (), Natalia Montinari () and Antonio Nicolò ()
Additional contact information
Valeria Maggian: University of Milano Bicocca
Natalia Montinari: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Antonio Nicolò: University of Manchester

Abstract: In this paper we investigate the role of reciprocity in sustaining the emergence of implicit collusive agreements in hierarchical organizations. We conduct a laboratory experiment in which an agent hires, on behalf of the principal, one worker out of two candidates. The two candidates differ in their ability and, once employed, the worker chooses a level of non-contractible effort to exert in two tasks: one benefits the organization (that is both the principal and the agent) while the other one is less profitable, only benefits the agent and provides him with higher earnings. We provide evidence that: i) low ability workers are more likely to exert effort in the task that is exclusively beneficial to the agent; ii) as a consequence, agents distort the hiring process in favor of the low ability workers and iii) sharing a small part of the organization’s profits with the workers alleviates their effort distortion.

Keywords: Conflict of Interest; Effort Distortion; Profit Sharing; and Reciprocity

JEL-codes: C91; J50; L14; M52

33 pages, April 8, 2015

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