the role of identity in work effort - experiments
TRANSCRIPT
The Role of Identity in Work Effort∗
Jeffrey V. Butler
Einaudi Institute for Economics and Finance, Rome, Italy
Abstract: A laboratory experiment was conducted in order to examine the impact ofinsider and outsider identities on effort incentives in the context of incomplete contracts.Consistent with the importance of identity for employee motivation, insider status inducedmore reciprocity—a steeper wage-effort relationship in fixed-wage contracts and less shirkingfor low wages in a two-state moral hazard environment with unobservable effort. The resultsare explained in an Akerlof and Kranton-style identity utility model, and have the novelimplication that firms may want to induce an outsider identity among employees in low(fixed-) wage industries.
JEL Classification: C9; J2; Z
Keywords: gift exchange; effort; identity; culture; experiment; contracts
∗I owe a great debt of gratitude to George A. Akerlof, Shachar Kariv, John Morgan and Steven MarcGoldman for many helpful comments. I am also grateful to to the National Science Foundation ResearchGrant SES 04-17871 and UC Berkeley’s X-lab for financial support.
1 Introduction
Non-monetary incentives factor heavily into many workers’ effort decisions (Akerlof, 1982;
Bewley, 1999; Fehr et al., 1993).2 The prevalence of fixed-wage and otherwise incomplete
contracts serves as a constant reminder of this fact. Among workers’ non-monetary in-
centives, Akerlof and Kranton (2005; 2008) argue convincingly that identity is particularly
important. In their view, firms can invest in policies that influence how workers see them-
selves in relation to the firm. Some policies (forming company sports teams, organizing
retreats, etc.) can lead employees to identify with the firm and internalize the firm’s goals.
Other policies, such as monitoring, can lead employees to adopt an identity in opposition
to the firm. For ease of exposition, call employees who choose to identify with their firm as
insiders. Call all other employees outsiders.
In order to assess when and how firms might benefit from inducing insider and outsider
identities, it is necessary to understand the consequences of identity in specific wage envi-
ronments. The current paper focuses on two broad classes: a fixed-wage environment and
an outcome-contingent wage environment involving unobservable employee effort. Identify-
ing the effects of identity using real-world data presents obvious challenges. Along with the
usual obstacles such as the unobservability of individuals’ wage-effort schedules, endogeneity
is also an issue.3 Therefore, the analysis was conducted using a laboratory experiment.
In some sessions of the experiment, the feeling of being an insider was induced among
participants (INS); in other sessions, the feeling of being an outsider was induced (OUT).
Irrespective of this first stage of identity-inducement, participants then engaged in a second
stage of the experiment in which two games were played: a gift exchange game (Fehr et al.,
1993), modelling a fixed-wage environment; and another simple game involving unobservable2 For an overview of experimental results in this vein, see Camerer (2003). For a more critical view of
the robustness of this research, see Charness et al. (2004).
3For example, tournaments designed to elicit extra effort from employees through competition may insteadinduce winners to identify more strongly with the firm, the result being a mechanical relationship betweenhigh-prodictivity tournament winners and various measures of loyalty to the firm.
1
effort and outcome-contingent wages. The results confirm the assertions of Akerlof and
Kranton (2008) in the outcome-contingent wage environment: insiders exerted more effort
for all possible outcome-contingent wages. In the gift exchange game, insiders did not exert
uniformly more effort, but rather exhibited more reciprocal wage-effort schedules: less effort
provision at low wage levels than outsiders, and more effort provision at high wage levels
than outsiders.
The variation in the impact of identity across these wage environments can be explained
in a simple identity utility model, with the assumption that an important normative concern
in the wage-setting environments studied is reciprocity.4 Given this assumption, recent
experimental evidence demonstrates that one prominent effect of creating a shared identity
is to increase the weight individuals place on situational normative concerns in decision-
making (Butler, 2008; Chen and Li, 2009; McLeish and Oxoby, 2008, 2007). In the current
context, since reciprocity dictates rewarding “nice” actions, the impact of enhancing concern
for reciprocity depends on what is considered nice.
In fixed wage environments, high wages are nice and low wages are “nasty.” Therefore,
enhancing reciprocity-concern should amplify the (positive) relationship between wages and
effort.5 On the other hand, in a moral hazard environment where low outcome-contingent
wages are not necessarily malign—low-powered wage incentives can reflect a high level of
trust, for instance—enhancing reciprocity can enhance effort provision even for low wages.
These are precisely the patterns present in the data.
The current paper contributes to the burgeoning literature on identity and economics by
verifying the intuition in Akerlof and Kranton (2005, 2008) that policies aimed at inducing
an insider identity can ameliorate moral hazard; and by shedding light on the specific mech-
anism underlying this phenomenon: enhanced concern for situational norms. One novel4Reciprocity is one prominent explanation for the positive relationship between effort and wages (e.g.,
Fehr et al., 1993; Akerlof, 1982). Also, simple moral hazard environments, including the one studied hereand in Akerlof and Kranton (2008) can also be thought of as a stochastic ultimatum game, where refusingto exert effort is analogous to rejecting the proposer’s offer. Reciprocity is often invoked in explainingultimatum game results (for an overview of utlimatum game experiments, see Camerer (2003).
5This will be shown more formally in the Explanations section, below.
2
implication of the results is that firms may, in some circumstances, rationally induce an
outsider identity among employees to avoid the negative consequences of reciprocity. This is
particularly likely when firms pay low wages, for which insiders would exert less effort than
outsiders.
The remainder of the paper is organized as follows. First, closely related literature is
outlined. In section 3 the experimental design is presented in detail. Section 4 presents the
results for the gift exchange game, followed by results for the moral hazard game. Then, in
section 5, possible explanations for the results are considered. The final section discusses
implications of the patterns in the data, and provides concluding remarks.
2 Closely Related Literature
The topic of social identity was introduced into economics in a pair of papers by Akerlof and
Kranton (Akerlof and Kranton, 2000; Akerlof and Kranton, 2005), which contain an excellent
overview of the background literature and motivating examples. The main hypothesis of this
literature is that the categories individuals use to think about themselves and others–their
social identities–in large part determine behavior through the normative concerns which are
inextricably intertwined with social identity.
The most closely related paper is McLeish and Oxoby (2008), where the authors manip-
ulate the salience of a particular social identity shared by their experimental partcipants—
being a student at the University of Calgary—and then have participants play the ultimatum
bargaining game. They show that increasing the salience of this shared social identity in-
creases proposers’ offers and responders’ minimum acceptable offers. This is consistent with
both bargainers being aware of the fact that social identity increases reciprocity, as rejecting
low offers is commonly taken to stem from negative reciprocity. Similar findings obtain in
McLeish and Oxoby (2007), where partcipants are more likely to punish members of their
own experimentally-induced, trivial, groups. In Butler (2008) sharing an experimentally-
3
induced, trivial, social identity is associated with increased trust and reciprocity in a trust
game, and increased honesty in a game involving deception, demonstrating that the effect
of identity varies with situational norms (trust, reciprocity and honesty, respectively). Gen-
erally similar patterns are present in Chen and Li (2009), where the authors show that
increased altruism is exhibited when dealing with in-group members, relative to interactions
involving out-group members.
Other closely-related papers examine the effects of increasing the salience of particular
real-world identities on various aspects of preferences. In Benjamin et al. (2007), the authors
investigate the effect of priming gender and ethnicity on risk tolerance and patience, and
find that making identity salient changes behavior in a way consistent with gender- and
ethnic-specific stereotypes. In (Ben-Ner et al., 2007), the authors prime specific identities
by providing demographic information to experimental participants about their about their
co-players and find behavior consistent with in-group favoritism. The main advantage of
priming is transparency—what is being made salient is obvious. The main drawback of this
approach is, again, transparency—it is likely obvious to the subjects what the researcher is
making salient. Therefore, it is many times unclear whether observed changes in behavior
stem from reactions to stereotypes, demand effects, or true preference changes.
Differently from existing papers, the current paper examines the effects of identity in two
broad and prevalent classes of incomplete contract environments. Also, unlike the existing
papers, the current paper induces the effects of identity indirectly by relying on the close re-
lationship between identities and value-systems as embodied in Akerlof and Kranton (2000),
and, more classically, in Durkheim (1967). This approach is complementary to the exist-
ing literature, while avoiding much of the demand effect associated with artificially-induced
trivial groups, as well as the endogeneity problems associated with real-world social iden-
tities. Results in the current paper and results in other papers where particular identities
were induced or directly primed provide mutually reinforcing evidence of the importance of
identity as a non-pecuniary incentive. The current paper extends the existing experimen-
tal evidence by considering the particularly economically-relevant class of such situations
4
involving incomplete contracts.
3 Experimental Design
The experiment consisted of two phases: an identity manipulation phase, and a game-playing
phase. There were two versions of the experiment and in each version the game playing phase
was identical. The versions were solely distinguished by the identity manipulation phase.
In one version of the experiment, the manipulation was meant to induce the feeling of being
an insider. In the second version of the experiment, participants were made to feel like
outsiders. The versions will therefore be referred to as the Insider (INS) version and the
Outsider (OUT) version. Each subject participated in exactly one version.
3.1 The Identity Salience Manipulation Phase
In the Insider (INS) version of the experiment, each subject viewed a list of normative values
(reproduced in the appendix). From this list, they were picked the value they deemed most
important to them, personally. After they picked this value, subjects were asked to either
write or think about why the value they chose was important to them, personally, for fifteen
minutes. After the fifteen minutes had expired, their writing materials were collected and
everyone proceeded to the game-playing phase. The Outsider (OUT) version was identical
to the INS version, except that, subjects were asked to choose the value least important to
them, personally and write or think about why the value they chose as least important to
themselves might be important to someone else.
The method used to engender the feeling of being an insider or an outsider builds on
the observation: the essential nature of being an insider in the current context is that work
reinforces your values, since you are surrounded by people whose values—by construction—
you share. And, speaking as an American living in Rome, the essential nature of being an
outsider is the constant reminder that the people around you have different values than your
own.
5
The list of values was constructed to be broad enough to minimize the risk of demand
effect. So, for instance, values such as honesty that had no direct behavioral prescription
were included on the list. At the same time, the list of values was narrow enough to include
values that were likely to be central to many subjects’ identities. For example, self-discipline
and responsibility were included. The full list of values, as well as the frequency with which
each value was selected, can be found in Table 10.
3.2 The Game-Playing Phase
In each round of the game-playing phase, subjects were randomly and anonymously paired
with a co-player, with whom they played two standard experimental games, detailed below.
In each round of each game, a player had one of two roles—employer or employee. In the
first round of each game, roles were randomly-assigned. In each subsequent round, roles
alternated. Since there were four rounds of each game played, each subject played each role
exactly twice for each game.
Random and anonymous pairings were used to minimize any repeated game effects such
as learning. To further minimize repeated game effects, subjects were never informed of the
outcome of any round of either game. Earnings were determined by randomly selecting one
round of each game, and paying subjects according to their decisions in that round.
3.2.1 Moral Hazard Game
Subjects first played a simple moral hazard game (MH). In MH, one employer is matched
with one employee. The employer has a project whose success depends on the effort of
her employee. If the employee exerts effort, the project has positive expected value, but
if the employee does not exert effort the project has zero value. Effort is costly to the
employee and unobservable to the employer. The outcome of the project is observable to
the employer, so that the employer can provide a pecuniary incentive to exert effort through
an outcome-contingent wage schedule.
The specific parameters of MH were as follows. The project was worth nothing if it
6
failed, and ten dollars if it succeeded. The probability of success depended solely on the
employee’s effort choice: the project succeeded with probability 34 if the employee exerted
effort, and failed with certainty otherwise. Exerting effort cost the employee one dollar.
Finally, there was limited liability, so that the least an employees could not make negative
earnings.
Each round of MH proceeded in the following manner: first, an employer and an employee
were randomly and anonymously paired. The employer moved first by announcing how much
the employee would be paid in the event of a success, 0 ≤ w ≤ 10. In the event of a failure,
it was common knowledge that the employee’s wage was fixed at zero. Next, the employee
observed w, and decided whether to exert effort. Finally, the outcome—success or failure—
was realized, which determined the employer’s and the employee’s earnings and ended the
round. Potential payoffs are summarized in Table 1.
Given this payoff structure, it is in the pecuniary interest of the employer to entice his
or her employee into exerting effort. For any success wage other than 10, employee effort
strictly increases employers’ expected earnings. Similarly, it is in the pecuniary interest of the
employee to exert effort: for any success wage, exerting effort weakly increases an employee’s
expected earnings.. Thus, all pure strategy (purely selfish) subgame-perfect equilibria of MH
involve the employer setting a low success wage (0, 1 or 2), and the employee exerting effort
with certainty for all w > 1.6
3.2.2 Gift Exchange Game
The second game subjects played was a standard Gift Exchange Game (GEG). The GEG is
a two-player sequential game of perfect information. In this game, one employer is matched
with one employee. The employer moves first by setting a wage level, w ∈ {0, . . . , 10}. Next,6For the wages 0 and 1, an employee earns 0 irrespective of his or her effort decision because of limited
liability. Employees are therefore indifferent between exerting effort or not exerting effort for these wagelevels. So, for instance, one subgame-perfect equilibrium of MH is for the employee to exert effort withcertainty for all wages other than 0, and the employer to therefore offer a “success” wage of 1. Anothersubgame-perfect equilibrium features an employee putting in effort with certainty for every wage other than1, and the employer therefore offering a success wage of 0.
7
the employee observes her wage and decides how much effort to exert, e ∈ {0.1, . . . , 1.0},
which determines earnings and ends the game. Higher effort levels are increasingly costly
to the employee, but, at the same time, beneficial to the employer. The employee’s cost of
effort function, c(e), is given in Table 2. For a given wage level and effort level the employer’s
earnings were (10−w)×e while the employee’s earnings were w−c(e). The earnings functions
as well as the cost of effort function were chosen to maintain comparability with the existing
experimental literature involving the GEG (cf. Fehr et al., 1993 or Charness et al., 2004.)
The strategic situation in GEG is exceedingly simple. All (purely selfish) subgame-
perfect equilibria of GEG feature the employee exerting the minimum possible effort, and,
consequently, the employer paying the minimum possible wage. On the other hand, to the
extent that reciprocity drives decision-making, we should expect wages and effort to be
positively correlated.7
In order to be able to observe subjects’ effort decisions at wage levels that were unlikely
to be offered, I used the strategy method in both GEG and MH to elicit employees’ actions.
That is to say, in GEG each employee was asked what level of effort they would exert for
each possible wage level. And in MH, each employee was asked whether or not they would
exert effort conditional on each possible wage level. The main concern with this approach
is that it could bias decision-making in favor of pecuniary interests as it likely mutes any
emotional content to decision. See Oxoby and McLeish (2004) and, Brandts and Charness
(2000) for a discussion of the relative merits of using this approach.
4 Results
4.1 The Data
All together, six sessions were conducted and 100 subjects participated. Three of these
sessions involved the OUT version of the experiment, while the remaining three sessions7An interesting feature of GEG that is not present in the closely-related “trust game” (Berg et al., 1995)
is that for high wage levels, reciprocity can be surplus-destroying. For instance, if the wage is 9, then themarginal unit of effort benefits the employer by only 0.1, but may cost the employee as much as 0.3.
8
involved the INS version. All sessions were conducted in the X-lab facilities at the University
of California, Berkeley. The subjects in the experiments were recruited from students and
staff at the University of California, Berkeley. During the course of the experiment, each
subject participated in four rounds of the gift exchange game and four rounds of the moral
hazard game.8
Overall, 50 subjects participated in the INS version of the experiment and 50 subjects
participated in the OUT version. In total there are 200 observations for each game in the
data. Because the strategy method was used for “employees” in both games, each of these
200 observations includes a complete effort function for each employee in both GEG and
MH.
Kolmogorov-Smirnov tests failed to reject the null hypothesis that the distribution of
actions was the same in early rounds as in later rounds of either game. This is true for both
employers and employees, for both games, and both within treatments as well as across
treatments. Therefore, all reported results involve pooling observations over all rounds for
each game. There is also limited self-reported demographic information, including gender,
available for each subject. There was gender-based variation in the data, but none of these
patterns were by themselves significant. Accordingly, I control for gender patterns where
feasible but do not analyze them in depth.
4.2 Gift Exchange Game
Employers’ average wage offers in the gift exchange were around half of the maximum
possible, and these wage offers did not differ significantly across versions. On the employee
side, pooling both versions of the experiment, the average implemented effort level was
slightly less than half.9 Both of these figures are in line with previous experiments involving
the GEG (cf. Charness et al., 2004; Fehr et al., 1998). Summary statistics are presented in8The experiment was programmed and conducted with the software z-Tree (Fischbacher, 2007).9Here, employee effort includes only the outcomes for each game. That is to say, given the actual wage
offer, w, the employee effort level that enters into this calculation was the effort level an employee reportedthey were willing to exert conditional on the wage w.
9
Table 3.
The main hypothesis of the experiment was that participants made to feel like insiders
would exhibit more reciprocity in terms of their effort-wage schedule. This hypothesis was
confirmed. Defining reciprocity as the difference between effort provision for the highest pos-
sible wage level and the lowest possible wage level, employees in the INS sessions had more
reciprocal wage schedules than employees in the OUT sessions (5.87 versus 4.50, respec-
tively). Controlling for gender effects, the difference in reciprocity is statistically significant
(Table 4). Comparing employees’ willingness to exert effort for each possible wage level (Ta-
ble 5), low wages induced less effort from INS employees than from OUT employees, while
the opposite was true for high wages. Restricting attention to actual observed outcomes,
the average implemented effort level in INS was about 10 percent higher than in OUT (4.43
versus 4.07, respectively).10
4.3 Moral Hazard Game
In the moral hazard game, both low and high wages have “nice” interpretations. Low wages
could be interpreted as indicative of employers placing a high level of trust in employees,
while high wages could be interpreted as altruistic surplus sharing. The implication of this
is that if making employees feel like insiders increases reciprocity, then we might expect
employees in the INS version of the experiment to be more likely to exert effort for low
wages and for high wages than their OUT counterparts.
The data support this hypothesis. Considering, first, employees’ entire strategy vectors,
for every possible success wage INS employees were more willing to exert effort (Table 1).
Estimating a logit discrete choice model for employees’ effort choices, and controlling for
gender effects, the difference in effort provision across versions is significant (Table 7). Shift-
ing attention from employees’ hypothetical effort provision to actual outcomes, estimating
a logit model of effort choice with a dummy for experiment version and controlling for both10This last comparison takes into account only the observed outcome of each interaction—i.e., the effort
level implied by the employers’ actual wage offers.
10
success wage and gender, INS employees were again significantly more likely to exert ef-
fort than their OUT counterparts (Table 8, p < 0.01).11 Furthermore, the increased effort
propensity in observed outcomes was not driven by the generosity of employers. Perhaps
anticipating the patterns in effort propensity, employers in the INS version of the experiment
offered lower “success wages” on average: 4.18 and 4.43, out of a possible 10, respectively.
5 Explanations
5.1 Identity
The data are broadly consistent with a social identity view of effort provision. Given the
different interpretations of what constituted a “nice” wage versus a “nasty” wage in GEG as
well as MH, creating a feeling of being an insider led to increased reciprocity in both games.
To illustrate the mechanics of this explanation, let us first focus on the gift exchange
game. Toward this end, consider a simple Akerlof and Kranton-style two-person utility
model used in Butler (2008):
Uj(aj , ai) = u(aj , ai)− αj [aj − aIdealcj (ai)]2 (1)
In words, the rate at which person j is willing to trade utility gains stemming from stan-
dard economic incentives–u(aj , ai)–against utility losses caused by falling short of her ideal—
aIdealcj (ai)—is measured by αj . Person j’s ideal is the action prescribed by her identity–cj–
given her co-player’s action, ai. The letter c is used since social identities can also be thought
as social categories. Previous experimental evidence suggests that the effect of creating a
shared social identity is to increase situational norm concerns. Here, this can be thought of
as increasing αj . Since, to a large extent, the norm governing employee behavior in the gift
exchange game is reciprocity, increasing αj has the effect of increasing reciprocity.11Robust standard errors were clustered at the session level to account for within-session dependence of
observations. The estimate is also significant using an analogous probit model (not reported), providing apartial robustness with respect to assumptions about the error distribution.
11
Somewhat more formally, in the gift exchange game employers set a fixed wage, w.
Employees then choose how much effort to exert, e. For simplicity, suppose wage and effort
share the same units and scale: 0 ≤ w, e ≤W . For concreteness, suppose the increasing and
convex cost of effort function is given by c(e) = e2, and that agent j’s ideal effort function
incorporates reciprocity as simply as possible: eIdeal(w) = w. Finally, suppose that worker
j is risk neutral in money, so that the economic utility component of j’s overall utility is
simply j’s monetary earnings:
uj(w, e) = w − c(e)
Plugging these assumptions into (1) yields:
Uj(w, e) = w − e2 − αj(e− w)2
Maximizing this function over e yields the optimal (interior) effort level function, e∗
e∗ =αj
1 + αjw
From this last equation it is clear that a higher αj implies an optimal effort level function
that is steeper in w. That is to say, reciprocity is increasing in αj . The patterns in the
data with respect to the gift exchange game are consistent with the notion that creating the
feeling of being an insider increased the decision weight, αj , given to norm concerns.
Increased norm-concern also explains the results in the moral hazard game. Assuming
that at least some workers interpreted low wages as “nice,” because, e.g, they signal a high
level of trust on the part of the employer, and therefore deserving of positive reciprocity, we
would expect more effort provision for low wages in worker j’s ideal effort function, eIdeal(w).
Increasing the weight, αj , that worker j puts on normative concerns will therefore increase
effort provision for these low wages–as was observed.
12
5.2 Distributional Preferences
The main potential alternative explanation for the patterns in the data, and the most widely-
cited models of other-regarding behavior, is distributional preferences. In distributional pref-
erences models preferences are defined over the distribution of money, or surplus, associated
with each possible game-outcome rather than solely in terms of own-payoffs. However, the
data in the current experiment are difficult to explain with distributional preferences alone.
Some popular forms of distributional preferences can be ruled out because they make
particularly strong predictions. For instance, consider a simple two-player inequality aversion
model (Fehr and Schmidt, 1999) where employee j’s preferences are a weighted average of
money earnings, xj , and disutility from inequality |xj − xi|.
Uj = xj − αj |xj − xi|
Plugging in the specific payoff functions used in the gift exchange game, inequality aver-
sion predicts that effort is weakly decreasing for wages above 5. This is so because employers’
earnings are (10−w)×e, meaning that a fixed amount of inequality reduction is more costly
at higher wages.12 However, almost all employees in the data increased their effort as wages
increased both above and below a wage of 5. Nor can the distributional preferences expla-
nation for behavior in the gift exchange game be rescued by adding preferences for surplus
maximization, as in Charness and Rabin (2002), since the cost of increasing surplus also
increases in wage.13
Finally, one might think that augmenting distributional preferences with reciprocity
could explain the current data. Putting aside particular models of distributional preferences,
the patterns in surplus distribution in the gift exchange game are not consistent with even12To see this, notice that for xj > xi–i.e., outcomes consisting of advantageous inequality, which are the
only possible outcomes for wages above 5–maximizing utility for a fixed wage w and fixed αj consists ofexerting effort whenever c′(e) < αj
1−αj(10− w). Thus, higher wages impose a more restrictive threshold for
exerting effort.13A similar calculation as in the previous footnote shows that either adding surplus maximizing indirectly
by putting a positive weight on co-players payoffs, or directly by adding a separate term incorporating aweight on total surplus, β[(10− w)e+ (w − c(e))], does not change the predicted decreasing effort pattern.
13
the spirit of reciprocity defined with respect to surplus distribution. To demonstrate this, I
used employees’ average effort functions across versions of the experiment to calculate the
average share of total surplus employees demanded for each wage level. I also computed
the maximum possible and minimum possible employee surplus for each wage level. What
these calculations show is that the share of surplus employees demanded was increasing
in wage when it did not have to be. Thus, from a distributional standpoint, “nicer” wages
resulted in lower surplus shares for employers in both versions of the experiment. This seems
contradictory to rewarding employers–in a distributional sense–for being nice. Employees’
share of surplus by wage are presented in Table 9.14
6 Concluding Remarks
Making participants feel like insiders, or alternatively, outsiders, in an experimental setting
led to significant and predictable variation in reciprocal behavior. This variation in recip-
rocal behavior had economically relevant consequences in two basic and well-studied wage
environments. In moral hazard environment, an insider identity led to an increase in effort
provision that, in money terms, benefited both employers and employees. Inducing the feel-
ing of being an insider in a fixed wage environment made employee effort more sensitive to
wages.
These patterns have implications for how and when a firm will prefer to use identity as
a non-monetary incentive device. For example, because enhancing reciprocity may lead to
less effort provision when wages are low in a fixed wage environment, firms might rationally
purposely induce an outsider identity among low-fixed-wage employees.
In a moral hazard environment, however, where wages can be conditioned on outcomes
that vary stochastically with effort, identity reinforcement is pareto improving. In these
environments, it might well behoove firms to implement policies aimed at making their14To be as fair as possible to the distributional explanation, I dropped from my calculation any subject who
always put in the minimal possible effort since these minimal-effort employees will demonstrate increasingsurplus share simply because of the payoff structure of the game. There were 12 such subjects, with the vastmajority–eight–coming from the OUT version of the experiment.
14
employees feel like insiders. This confirms the intuition present in Akerlof and Kranton
(2008), which focuses on a moral hazard environment.
Taken together, these patterns provide a novel explanation for the common practice of
creating salient dividing lines within firms. These divides are brought about by, for instance,
making low-level employees wear demeaning uniforms (think: hot dog on a stick), while
making high level employees wear more respectable uniforms (business suits). These divides
are also brought about and made salient through purposely-created and visible resource
differences such as more luxurious break rooms for management than for workers.
15
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Success Earnings Failure EarningsProb(Success) Employer Employee Employer Employee
EmployeeExerts Effort 0.75 10− w max{0, w − 1} 0 0Does not Exert Effort 0 0 0 0 0
1. The fact that employees cannot earn negative amounts reflects limited liability.
Table 1: Earnings in the Moral Hazard game.
Effort Level 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0Cost of Effort (Dollars) 0.0 0.1 0.2 0.4 0.6 0.8 1.0 1.2 1.5 1.8
Table 2: Employee’s Cost of Effort Function, Gift Exchange Game
Wage Level Effort Level Employer Earnings Employee Earnings
Mean 4.57 0.43 1.96 4.02Standard Error (0.166) (0.022) (0.117) (0.152)
10th percentile 1 0.1 0.50 1.0020th percentile 3 0.1 0.60 2.2030th percentile 4 0.1 0.80 3.2040th percentile 4 0.2 1.00 3.9050th percentile 5 0.4 1.60 4.2060th percentile 5 0.5 2.10 4.4070th percentile 5 0.6 2.50 4.8780th percentile 6 0.7 3.00 5.0090th percentile 7 1.0 4.0 6.59
N 200 200 200 200
Table 3: Gift Exchange Game, Summary Statistics
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Dependent Variable = Reciprocity
INS Male INS×Male Constant N R2
1.74∗∗ 1.24 -1.39 4.15∗∗∗ 200 0.04(0.552) (0.818) (0.847) (0.536)
1. Reciprocity is defined as an employee’s effort level conditionalon the highest possible wage, minus the employee’s effort levelconditional on the lowest possible wage.2. Robust standard errors in parentheses.3. ∗∗∗ = significant at 1 % level; ∗∗ = significant at 5 %4. Standard errors are clustered by session (6 clusters).
Table 4: Reciprocity Differences in GEG, Across Versions
Wage0 1 2 3 4 5 6 7 8 9 10
VersionINS 1.43 1.77 2.30 2.86 3.59 4.60 5.40 6.01 6.40 6.89 7.30
(0.182) (0.180) (0.210) (0.218) (0.235) (0.261) (0.284) (0.297) (0.306) (0.316) (0.328)
OUT 1.69 2.00 2.45 2.94 3.57 4.44 5.04 5.32 5.62 5.96 6.19(0.215) (0.214) (0.225) (0.249) (0.266) (0.289) (0.304) (0.313) (0.333) (0.350) (0.364)
1. Standard errors in parentheses.2. Data are from employees’ entire strategy vectors, so there are 200 observations for each wage level.
Table 5: Effort Level in GEG, by Wage and Across Versions
Success Wage0 1 2 3 4 5 6 7 8 9 10
VersionINS 0.05 0.16 0.49 0.65 0.77 0.88 0.84 0.81 0.81 0.81 0.83
(0.022) (0.037) (0.050) (0.048) (0.042) (0.033) (0.037) (0.039) (0.039) (0.039) (0.038)
OUT 0.04 0.14 0.35 0.5 0.62 0.81 0.72 0.71 0.70 0.69 0.72(0.020) (0.035) (0.048) (0.050) (0.049) (0.039) (0.045) (0.046) (0.046) (0.046) (0.045)
1. Standard errors in parentheses.2. Data are from employees’ entire strategy vectors, so there are 200 observations for each wage level.
Table 6: Effort Propensity in MH, by Success Wage and Across Versions
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Dependent Variable = Employee’s Effort ChoiceWage INS INS× Male Male×Wage Male× Male× Const. N R2
Wage INS INS×Wage
0.28∗∗∗ -0.33 0.17∗∗∗ -0.51 0.21 3.26∗∗∗ -0.67∗∗ -0.91∗∗∗ 1100 0.178(0.040) (0.275) (0.057) (1.164) (0.216) (1.261) (0.319) (-0.910)
1. Robust standard errors, clustered at the session level, in paretheses.2. ∗∗∗ = significant at 1 percent level; ∗∗ = significant at 5 percent level.3. Estimates include employees’ entire strategy vectors, implying 1100 observations total.
Table 7: Employees’ Hypothetical Propensity to Exert Effort, MH, Logit Model
Dependent Variable = Employees’ Actual Effort ChoicesWage INS Male Const. N R2
0.38∗∗∗ 0.53∗∗ 0.26 -1.54∗∗∗ 200 0.106(0.150) (0.117) (0.422) (0.576)
1. Robust standard errors, clustered at the session level, in paretheses.2. ∗∗∗ = significant at 1 percent level; ∗∗ = significant at 5 percent level.3. Estimates include only observed outcomes, implying 200 observations total.
Table 8: Employees’ Actual Propensity to Exert Effort, MH, Logit Model
Imputed Average Employee Share of SurplusMin Possible OUT Version INS Version Max Possible
Wage0 0 0 0 01 0 0.4 0.43 0.532 0.02 0.52 0.55 0.713 0.15 0.58 0.60 0.814 0.27 0.62 0.64 0.875 0.39 0.65 0.66 0.916 0.51 0.70 0.70 0.947 0.63 0.77 0.76 0.968 0.76 0.84 0.83 0.989 0.88 0.92 0.91 0.9910 1 1 1 1
Table 9: GEG, employees’ hypothetical average surplus shares, by wage
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Subjects’ Ages
HIS LIS
Age Female Male Female Male
17 1 0 0 018 3 1 2 219 7 3 4 420 5 4 5 721 12 4 7 622 3 4 4 223 0 1 0 224 1 0 1 025 1 0 0 027 0 0 1 029 0 0 0 130 0 0 1 056 0 0 1 0
Total 33 17 26 24
Table 10: Subjects’ Ages, frequency by gender and version
Subjects’ Most and Least Important Values
Most Important (HIS) Least Important (LIS)
Value Female Male Overall Female Male Overall
Self-discipline 0 1 1 4 2 6Responsibility 6 2 8 0 0 0Full potential 11 7 18 2 0 2Self-sufficiency 2 0 2 0 1 1Living in moment 3 2 5 11 11 22Working Hard 0 0 0 0 1 1Dependability 2 0 2 5 2 7Helping others 4 4 8 2 1 3Helping your own people 1 0 1 2 4 6Honesty 4 1 5 0 2 2
Total 33 17 50 26 24 50
Table 11: Subjects’ Values, frequency by gender and version
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