DP13057 When No Bad Deed Goes Punished: Relational Contracting in Ghana and the UK

Author(s): Elwyn Davies, Marcel Fafchamps
Publication Date: July 2018
Keyword(s): conditional reciprocity, Ghana, gift-exchange game, punishment strategies, relational contracting
JEL(s): C71, D2, D86, E24, O16
Programme Areas: Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13057

Experimental evidence to date supports the double theoretical prediction that parties transacting repeatedly punish bad contractual performance by reducing future offers, and that the threat of punishment disciplines opportunistic breach. We conduct a repeated gift-exchange experiment with university students in Ghana and the UK. The experiment is framed as an employment contract. Each period the employer makes an irrevocable wage offer to the worker who then chooses an effort level. UK subjects behave in line with theoretical predictions and previous experiments: wage offers reward high effort and punish low effort; this induces workers to choose high effort; and gains from trade are shared between workers and employers. We do not find such evidence among Ghanaian subjects: employers do not reduce wage offers after low effort; workers often choose low effort; and employers earn zero payoffs on average. These results also hold if we use a strategy method to elicit wage offers. Introducing competition or reputation does not significantly improve workers' effort. Using a structural bounds approach, we find that the share of selfish workers in Ghana is not substantially different from the UK or earlier experiments. We conclude that strategic punishment in repeated labor transactions is not a universally shared heuristic.