Abstract
A large number of studies suggest that reciprocity constitutes a basic motivational drive. This paper shows that reciprocity can account for a wide range of empirical phenomena: It (1) is a powerful effort elicitation device, (2) explains why employers refuse to hire underbidders and, hence, why wages are downwardly rigid, (3) gives rise to non-compensating wage differentials and to a positive correlation between profits and wages, (4) provides a rationale for the absence of explicit financial incentives, and (5) is a key force that sustains social norms.
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