Fair Wages and Effort Provision: Combining Evidence from a Choice Experiment and a Field Experiment

Abstract

The presence of workers who reciprocate higher wages with greater effort can have important consequences for firms and labor markets. Knowledge about the extent and determinants of reciprocal effort choices is, however, incomplete. We investigate the role of fairness perceptions and social preferences in a field experiment in which workers were hired for a one-time job. We show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, whereas those who feel adequately paid or overpaid at the base wage do not change their performance. Moreover, we find that only the workers who display reciprocity in a choice experiment show reciprocal effort responses in the field. The workers who lack reciprocity in the choice experiment do not respond to the wage increase, even if they feel underpaid at the base wage. Our findings suggest that fairness perceptions and social preferences are key in workers' performance response to wage increases. In our study, the wage increase affects effort mainly through the removal of perceived unfairness, i.e., the elimination of negative reciprocity toward the firm, rather than positive reciprocity. These results are the first direct evidence of the fair-wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1970 . This paper was accepted by Uri Gneezy, behavioral economics.