Gift exchange in the lab - it is not (only) how much you give ...

An important aspect in determining the effectiveness of gift exchange relations in labor markets is the ability of the worker to repay the gift to the employer. To test this hypothesis, we conduct a real effort laboratory experiment where we vary the wage and the effect of the worker's effort on the manager's payoff. Furthermore we collect additional information that allows us to control for the workers' ability and whether they can be classified as reciprocal or not. From our agency model of reciprocal motivation we derive non-trivial predictions about which is the marginal worker (in terms of ability) affected by our experimental variation and how different types of individuals, selfish and reciprocal, will react to it. Our model does substantially better than other theories in organizing the data.