Robustness of Relational Contracts to Interruptions in Employer-Worker Gift Exchange Experiments

This paper experimentally investigates the robustness of the “two-tiered labor market” of Brown, Falk and Fehr (2004). In the experiments, relatively efficient private relational contracts emerge between firms and specific workers, as firms make worker-specific wage effors. Public contracts which any worker can accept are also made.. Robustness is tested by introducing stochastic interruptions in which firms cannot hire workers for three periods. Workers that are involuntarily laid off by the interruptions are eager to be reemployed; they are unselective about job offers and typically do not shirk. Firms prefer these laid-off “temp workers” to others who weren't laid off. Heightened job insecurity induces all workers to compete to enter relational contracts why delivering substantial effort close to the level requested by firms. The results show that interruptions may shorten relational contracts but do not harm market efficiency (except in the last few periods when there is more shirking). A simplified equilibrium model in which fair-minded and selfish workers both exist make several predictions about the nature of contracts and dynamics which are generally consistent with the evidence