Speaker: Marcel Fafchamps is a Senior Fellow at Stanford University. More »
Abstract: We study relational contracting patterns in Ghanaian labour markets by conducting a gift-exchange game lab experiment, in which subjects interact in a principal-agent setting as workers or employers. In this game, employers make wage offers to workers, who can then choose to accept or reject this offer and, after accepting and being paid, what effort to exert. The employers and workers interact repeatedly over several periods. While in earlier experiments in developed countries relational contracting, in which cooperation is sustained by a threat of punishment of non-cooperative behaviour, emerged naturally (e.g. Brown et al., 2004, 2012), we do not find evidence for this. In particular, we do not find conditional reciprocity on behalf of the employers: employers in our experiment do not punish low effort provision. As a result, employers fail to discipline a subgroup of “selfish” workers, resulting in a low average effort and low and often negative employers’ earnings. Set identification of Fehr-Schmidt preferences of the workers shows that the share of “selfish” workers in our experiment is not substantially different from earlier experiments. Introducing competition for workers or a reputation mechanism does not significantly improve workers’ effort.
Last Updated: Sep 15, 2015