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Article - Fehr (fairnes prevent market clearing)

6 important questions on Article - Fehr (fairnes prevent market clearing)

There’s a positive relationship between wages and work effort. Because of this,

it is profitable for employers to pay wages above the market-clearing level (where unemployment = 0).

Efficiency wage hypothesis:

wage variations are accompanied by different degrees of punishment for shirking. Wage increase raises the costs of shirking, because if the worker is detected shirking and is fired, he will lose more money. -

Fair wage-effort hypothesis:

wage increases raise workers’ effort levels even in the absence of any increase in the penalty for shirking.

Suppose all agents in the two-stage experiment are money maximizers, and that this is common knowledge. Effort is costly for the workers and they cannot be punished for providing a low effort.

They have no incentive to choose e > emin. Rational employers will expect e = emin. Wages now converge to the lowest wage possible, minus the costs.

Is the Hypothesis accepted: the effort level increases when the wage increases (and employers are therefore willing to pay a wage greater than the market-clearing wage).

accepted. Higher wage leads to higher effort. Fairness prevented wage from decreasing to the market-clearing level. Fair wage-effort hypothesis is accepted. Effort decision is a very effective weapon for sellers, because it renders a high wage policy profitable for the buyers.

Read Fehr et al., “Does fairness prevent market clearing?” Which type of efficiency wage theory is tested in this article? Describe the experiment and the main results.

Gift-exchange efficiency wages (here called ‘fair wage’ hypothesis). It is measures whether a ‘gift’ of a high wage is reciprocated by the worker by exerting higher effort. The experiment is an auction during a time of unemployment (so employers do not have to offer higher wages in order to attract workers). Employers offer higher than equilibrium wages and workers react by putting in more effort.

The question on the page originate from the summary of the following study material:

Games and Information An Introduction to Game Theory | 9781405136662 | Eric Rasmusen

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