DP3018 Reputation and Reciprocity: Consequences for Labour Relations

Author(s): Armin Falk, Simon Gächter
Publication Date: October 2001
Keyword(s): incomplete contracts, reciprocity, repeated games, reputation
JEL(s): J30
Programme Areas: Labour Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3018

Recent evidence highlights the importance of social norms in many economic relations. Many of these relationships are long-term and provide repeated game incentives for performance. We experimentally investigate interaction effects of reciprocity and repeated game incentives in two treatments (one-shot and repeated) of a gift-exchange game. In both treatments we observe reciprocity, which is strengthened in the repeated game. A detailed analysis shows that in the repeated game some subjects imitate reciprocity. Thus, reciprocity and repeated game incentives reinforce each other. Observed behaviour is robust against experience. We conclude that a long-term interaction is a ‘reciprocity-compatible’ contract enforcement device.