Chapter 38 Reciprocity in Experimental Markets

This chapter summarizes main findings of five experimental studies. These studies were primarily designed to test the fair wageeffort hypothesis in the context of competitive experimental markets. The fair wageeffort hypothesis stipulates that wage increases raise workers' effort levels. Facing the incompleteness of labor contracts it may, therefore, be profitable for firms to pay wages above the competitive level, which in turn may lead to involuntary unemployment. Besides this labor market interpretation, our experiments can however also be interpreted as stylized versions of incomplete goods or service markets. Suppose an incomplete market in which the price of the good or service is fixed before the good is produced or the service is rendered. If the quality of this good or service cannot be specified in the contract or if the quality is not verifiable by third parties the well-known lemons phenomenon may arise. Goods with quality levels above the minimum are driven out of the market and only goods with minimum quality are traded.