Huck, S.; Seltzer, A.J.; Wallace, B.; (2009) Pensions in the laboratory: the role of commitment and reputation for deferred compensation in multi-period labor contracts. (ELSE Working Papers 335). ESRC Centre for Economic Learning and Social Evolution: London, UK.

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Abstract

This paper examines the relationship between firms‘ wage offers and workers‘ supply of effort in a multi-period environment. If firms are able to commit to a schedule of wage payments, in equilibrium they will offer deferred compensation: first-period productivity is positive and wages are zero, while last-period productivity is zero and wages are positive. Workers respond to deferred compensation by supplying sufficient effort to avoid dismissal. In the absence of commitment, firms pay zero wages and workers supply low effort. The experiment produces strong evidence of these predictions. With commitment, we frequently observe deferred compensation and relatively high worker effort. In the absence of commitment, we observe no deferred compensation, much lower wages, and little worker effort. A third treatment where commitment is not possible, but firms are able to build a reputation, produces an intermediate result. Finally, we also find some evidence of gift exchange, in particular in the absence of commitment when deferred compensation does not work.

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