Classical and Belief-Based Gift Exchange Models: Theory and Evidence

45 Pages Posted: 14 Apr 2021

See all articles by Sanjit Dhami

Sanjit Dhami

University of Leicester

Mengxing Wei

University of Leicester - Division of Economics, School of Business, Students

Ali al-Nowaihi

University of Leicester - Department of Economics

Date Written: 2021

Abstract

We derive, compare, and test the predictions of three models of gift exchange: Classical (CGE); Augmented (AGE) based on unexpected wage surprises and first order beliefs; and Belief-based (BGE) that uses second order beliefs to formally model guilt-aversion. Motivated by Akerlof (1982), we also introduce signals of exogenous industry wage norms, θw, and effort norms, θe. We study the effects on the worker’s optimal effort of exogenous variation in the wage, w, the signals θw, θe, and a signal of firm’s expectations of effort from the worker, s. All three models successfully predict gift exchange (higher effort in response to higher w). The AGE and the CGE models fail to explain the data for the worker’s effort responses to the signals θw, θe, and s. The BGE model successfully explains the data in all these respects. Gift exchange is underpinned by guilt-aversion and a formal modelling of second order conditional beliefs.

JEL Classification: D010, D910

Suggested Citation

Dhami, Sanjit and Wei, Mengxing and al-Nowaihi, Ali, Classical and Belief-Based Gift Exchange Models: Theory and Evidence (2021). CESifo Working Paper No. 8992, Available at SSRN: https://ssrn.com/abstract=3826068 or http://dx.doi.org/10.2139/ssrn.3826068

Sanjit Dhami

University of Leicester ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

HOME PAGE: http://www2.le.ac.uk/departments/economics/people/sdhami

Mengxing Wei (Contact Author)

University of Leicester - Division of Economics, School of Business, Students ( email )

United Kingdom

Ali Al-Nowaihi

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

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