Triggering Reciprocity in a Principal-Agent Game

Abstract

This paper considers a modified principal-agent environment, where principals have options to either incentivize agents, or trigger agents' reciprocity. Because the production is uncertain, principals' fixed rate transfer can be easily interpreted as good intention. Theory suggests that principals who believe in agents' reciprocity should customize offers so that reciprocal agents would increase their effort. We test the principals' and agents' behavior using a lab experiment. Compared with a market of self-regarding agents, the experimental markets witness significant higher offers of fixed rate wage. Estimations on agents' effort choice confirm the effects of both positive and negative reciprocity. Yet negative reciprocity has a greater impact on efforts and principals' wage offers. Overtime, when principals do not have reciprocity information to screen agents, the reciprocity reference points decline and negative reciprocity (positive reciprocity) becomes harder (easier) to trigger. However, when principals can assess to individual level reciprocity measures, the reference points maintain at high levels. Consequently, principals' customized fixed rates only correlate with reciprocity measures at the latter rounds of the game.