The gift-exchange game is a game that has been introduced by Akerlof and Yellen as standard for modeling labor relations.Two players are at least involved in such game – an employee and an employer. The employer has to decide first, whether to award a higher salary. Then, the decision of the employee about putting extra effort follows. Like trust games, gift-exchange games are used to study reciprocity for human subject research in social psychology and economics. If the employer pays extra salary and the employee puts extra effort, then both players are better off than otherwise. The relationship between an investor and an investee has been investigated as the same type of a game.
The extra effort in gift-exchange games is modeled to be a negative payoff if not compensated by salary. The IKEA effect of own extra work is not considered in the payoff structure of this game. Therefore, this model rather fits labor conditions, which are less meaningful for the employees.
Like in trust games, game-theoretic solution for rational players predicts that employees’ effort will be minimum for one-shot and finitely repeated interactions. Therefore, there is no incentive for the employer to pay a higher salary.If the employer pays a higher salary, it is irrational for the employee to put extra effort, since effort will reduce his or her payoff. It is also irrational for the employee to put extra effort while receiving a lower salary. Therefore, the minimum salary and the minimum effort is the equilibrium of this game.
The payoff matrix of the gift-exchange game has the same structure as the payoff matrix of Prisoner's dilemma. The difference constitutes by the sequentiality of gift-exchange game.
A positive relationship between salary and effort has been observed in a large number of gift-exchange experiments.This behavior obviously deviates from the equilibrium. In a game of one employer and one employee, an experiment on 84 undergraduate students from the University of Amsterdam showed a rate of only 23.8% of employee's minimal effort for high salary. Another experiment with students from Tilburg University showed that only 33% of games ended up in the Nash equilibrium with minimal salary and minimal effort. Data from another experiment on 123 students from University of Nottingham showed a rate of 69% for high salary being paid by employer in advance.
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate subjects, in order to mimic real-world incentives. Experiments are used to help understand how and why markets and other exchange systems function as they do. Experimental economics have also expanded to understand institutions and the law.
The ultimatum game is a game that has become a popular instrument of economic experiments. It was first described by Werner Güth, Rolf Schmittberger, and Bernd Schwarze: One player, the proposer, is endowed with a sum of money. The proposer is tasked with splitting it with another player, the responder. Once the proposer communicates their decision, the responder may accept it or reject it. If the responder accepts, the money is split per the proposal; if the responder rejects, both players receive nothing. Both players know in advance the consequences of the responder accepting or rejecting the offer.
In labor economics, the efficiency wage hypothesis argues that wages, at least in some labour markets, form in a way that is not market-clearing. Specifically, it points to the incentive for managers to pay their employees more than the market-clearing]] wage to increase their productivity or efficiency, or to reduce costs associated with employee turnover in industries in which the costs of replacing labor are high. The increased labor productivity and/or decreased costs may pay for the higher wages.
In social psychology, reciprocity is a social norm of responding to a positive action with another positive action, rewarding kind actions. As a social construct, reciprocity means that in response to friendly actions, people are frequently much nicer and much more cooperative than predicted by the self-interest model; conversely, in response to hostile actions they are frequently much more nasty and even brutal.
In game theory, the centipede game, first introduced by Robert Rosenthal in 1981, is an extensive form game in which two players take turns choosing either to take a slightly larger share of an increasing pot, or to pass the pot to the other player. The payoffs are arranged so that if one passes the pot to one's opponent and the opponent takes the pot on the next round, one receives slightly less than if one had taken the pot on this round. Although the traditional centipede game had a limit of 100 rounds, any game with this structure but a different number of rounds is called a centipede game.
Matching pennies is the name for a simple game used in game theory. It is played between two players, Even and Odd. Each player has a penny and must secretly turn the penny to heads or tails. The players then reveal their choices simultaneously. If the pennies match, then Even keeps both pennies, so wins one from Odd. If the pennies do not match Odd keeps both pennies, so receives one from Even.
The dictator game is a popular experimental instrument in social psychology and economics, a derivative of the ultimatum game. The term "game" is a misnomer because it captures a decision by a single player: to send money to another or not. The results – most players choose to send money – evidence the role of fairness and norms in economic behavior, and undermine the assumption of narrow self-interest.
Personnel economics has been defined as "the application of economic and mathematical approaches and econometric and statistical methods to traditional questions in human resources management". It is an area of applied micro labor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal. In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers.
Inequity aversion (IA) is the preference for fairness and resistance to incidental inequalities. The social sciences that study inequity aversion include sociology, economics, psychology, anthropology, and ethology.
In contract theory, signalling is the idea that one party credibly conveys some information about itself to another party. Although signalling theory was initially developed by Michael Spence based on observed knowledge gaps between organisations and prospective employees, its intuitive nature led it to be adapted to many other domains, such as Human Resource Management, business, and financial markets.
The public goods game is a standard of experimental economics. In the basic game, subjects secretly choose how many of their private tokens to put into a public pot. The tokens in this pot are multiplied by a factor and this "public good" payoff is evenly divided among players. Each subject also keeps the tokens they do not contribute.
Ernst Fehr is an Austrian-Swiss behavioral economist and neuroeconomist and a Professor of Microeconomics and Experimental Economic Research, as well as the vice chairman of the Department of Economics at the University of Zürich, Switzerland. His research covers the areas of the evolution of human cooperation and sociality, in particular fairness, reciprocity and bounded rationality.
Quantal response equilibrium (QRE) is a solution concept in game theory. First introduced by Richard McKelvey and Thomas Palfrey, it provides an equilibrium notion with bounded rationality. QRE is not an equilibrium refinement, and it can give significantly different results from Nash equilibrium. QRE is only defined for games with discrete strategies, although there are continuous-strategy analogues.
In game theory, the traveler's dilemma is a non-zero-sum game in which each player proposes a payoff. The lower of the two proposals wins; the lowball player receives the lowball payoff plus a small bonus, and the highball player receives the same lowball payoff, minus a small penalty. Surprisingly, the Nash equilibrium is for both players to aggressively lowball. The traveler's dilemma is notable in that naive play appears to outperform the Nash equilibrium; this apparent paradox also appears in the centipede game and the finitely-iterated prisoner's dilemma.
Strong reciprocity is an area of research in behavioral economics, evolutionary psychology, and evolutionary anthropology on the predisposition to cooperate even when there is no apparent benefit in doing so. This topic is particularly interesting to those studying the evolution of cooperation, as these behaviors seem to be in contradiction with predictions made by many models of cooperation. In response, current work on strong reciprocity is focused on developing evolutionary models which can to account for this behavior. Critics of strong reciprocity argue that it is an artifact of lab experiments, and does not reflect cooperative behavior in the real world.
Armin Falk is a German economist. He has held a chair at the University of Bonn since 2003.
Social preferences are a type of preferences studied in behavioral and experimental economics and social psychology. A person exhibits social preferences if he/she not only cares about his/her own material payoff, but also the reference group's payoff or/and the intention that leads to the payoff. Types of social preferences include altruism, fairness, reciprocity, and inequity aversion.
Behavioral game theory analyzes interactive strategic decisions and behavior using the methods of game theory, experimental economics, and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom and neglect of altruism, fairness, and framing effects. As a research program, the subject is a development of the last three decades.
Gary Charness is Professor of Economics and the Director of the Experimental and Behavioral Economics Laboratory in the Department of Economics at the University of California, Santa Barbara. Charness is an economist and social scientist, specializing in experimental and behavioral work; he is currently ranked 5th in the world by RePEc in the field of experimental economics and has published nearly 80 academic articles. Charness is a contributor to several areas of economic research, including social preferences, identity and group membership, communication and beliefs, behavioral interventions, group decision-making, social networks, gender, and individual decision-making. A centerpiece of his research has been to effect beneficial social outcomes in difficult economic environments. Charness's work has been discussed and published in The New York Times and Science, as well as in other media. Charness is married and has three children.
Urs Fischbacher is a Swiss economist and professor of applied economic research at the University of Konstanz. He is director of the Thurgau Economic Institute, an affiliated institute of the University of Konstanz. He pioneered the field of software tools for experimental economics.