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The influence of potential on wages and effort

Published online by Cambridge University Press:  14 March 2025

Gary Bolton  and
Peter Werner
Gary Bolton*
Affiliation:
Jindal School of Management, University of Texas at Dallas, 800 West Campbell Road, Richardson, TX 75080, USA
Peter Werner*
Affiliation:
Department of Economics, University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany
*
[email protected]
[email protected]
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Abstract

We investigate how employee potential influences wage offers and effort exertion in a gift exchange experiment. In particular, we test if gift exchange based on a commonly accepted norm for wage differentiation can emerge in a setting where the wage demands of agents are heterogeneous. We also analyse how communication by principals responds to the unequal wage demands and how it influences agents’ decisions about working effort in the presence of varying degrees of bargaining power. We find that differences in productivity and the resulting entitlements lead to differentiation in wages. High productivity agents are offered substantially higher wages than low productivity agents. Results from a control experiment suggest that a large part of this wage markup is related to the future productivity potential of high performers. At the same time, unequal wage schemes do not substantially crowd out effort exertion: we observe no strong detrimental effects from disadvantageous relative wage positions. Certain communication patterns significantly influence effort exertion.

Keywords

CommunicationEntitlementsFairness normsGift exchangeRelative wages

JEL classification

D63: Equity, Justice, Inequality, and Other Normative Criteria and Measurement J31: Wage Level and Structure • Wage Differentials M52: Compensation and Compensation Methods and Their Effects C92: Laboratory, Group Behavior
Type
Original Paper
Information
Experimental Economics , Volume 19 , Issue 3 , September 2016 , pp. 535 - 561
Copyright
Copyright © 2015 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-015-9453-0) contains supplementary material, which is available to authorized users.

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