Social exchange in the labor market: Reciprocity and trust versus egoistic money maximization

Abstract

This paper presents results from a series of experimental labor markets. The implications of standard economic theory are contrasted with social exchange predictions. According to standard economic theory, workers and employers are rational egoistic individuals who strive to maximize profit. In markets, as well as in bilateral interactions, employers should offer the lowest wages which workers will accept and workers should provide the effort level which maximizes their utility (i.e. the minimum permitted). According to social exchange principles, wage negotiations between employers and workers are not only determined by egoistic profit maximization but also by social norms. Interacting partners stick to the norm of reciprocity and reciprocate favors. Employers are supposed to trust reciprocation norms and offer higher than reservation wages, expecting workers to provide higher effort in response. Consequently, workers' effort choices are expected to be positively correlated to employers' wage offers. Four experimental conditions were realized to test hypotheses deriving from standard economic theory and social exchange theory. In general, standard economic theory was poorly supported. Reciprocation norms were found to be important and, on average, cooperation was considerably higher than predicted by economic theory. There were, however, significant differences between participants: some workers cooperated over a series of bilateral trading periods and in market situations, whereas others did not. It is argued that economic theory needs to take into account both social norms and also personality differences as well as nonstandard motives which underlie human behavior.