Experimental & Behavioural Economics Seminar - Vera te Velde (University of Queensland)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton


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Joshua Miller


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Title: The role of expectations in repeated gift exchange interactions

Abstract: Macera and te Velde (working paper) develops a theory of reference-dependent reciprocity in the context of gift exchange. This theory delivers four main messages about the efficacy and efficiency of gift exchange: (1) gifts are more powerful when they surprise workers; (2) the power of surprising gifts, however, wanes over time; (3) gifts are cursed, as once a firm grants one, it should grant it forever; and therefore (4) gifts are most likely profitable in short-term interactions. We test these predictions in a laboratory gift exchange experiment in which we allow repeated interactions between the same worker and employer without introducing reputational concerns. Employers pre-commit to a series of 25 wages, and workers then learn their wages on a period-by-period basis and choose effort levels in response. By comparing effort across time in situations with no gift exchange (i.e. a constant wage), a single instance of gift exchange, a permanent wage raise, or with a high or low probability of receiving a gift in each period, we are able to examine the long-run effect of gifts on expectations and on later effort.  We find that effort is strongly correlated with difference between the wage and the expected wage. However, the reference point seems to be influenced not only by current expectations but also by past experience. This makes one-time gift exchange even less profitable in the long run than predicted by the model, and forces the employer to issue repeated gifts simply to maintain baseline levels of effort. Gift exchange exhibits decreasing power over time and is not profitable after a short timeframe, which confirms the key predictions of the model.