Gift-exchange game

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Idealistic representation of gift-exchange game in extensive form. This game has only one single Nash equilibrium. Actions predicted by this equilibrium are colored black.

The gift-exchange game is a game that has been introduced by Akerlof and Yellen as standard for modeling labor relations.[1] Two players are at least involved in such game – an employee and an employer. The employer has to decide first, whether to award a higher salary. Then, the decision of the employee about putting extra effort follows. Like trust games, gift-exchange games are used to study reciprocity for human subject research in social psychology and economics.[2] If the employer pays extra salary and the employee puts extra effort, then both players are better off than otherwise. The relationship between an investor and an investee has been investigated as the same type of a game.[3]

Equilibrium analysis[edit]

The extra effort in gift-exchange games is modeled to be a negative payoff if not compensated by salary. The IKEA effect of own extra work is not considered in the payoff structure of this game. Therefore, this model rather fits labor conditions, which are less meaningful for the employees.[4][5]

Like in trust games, game-theoretic solution for rational players predicts that employees’ effort will be minimum for one-shot and finitely repeated interactions. Therefore, there is no incentive for the employer to pay a higher salary.[1][2][6] If the employer pays a higher salary, it is irrational for the employee to put extra effort, since effort will reduce his or her payoff. It is also irrational for the employee to put extra effort while receiving a lower salary. Therefore, the minimum salary and the minimum effort is the equilibrium of this game.

The payoff matrix of the gift-exchange game has the same structure as the payoff matrix of Prisoner's dilemma. The difference constitutes by the sequentiality of gift-exchange game.[7]

Experimental results[edit]

In the game of one employer and two employees, the employer pays equal wages in one treatment and can set individual wages in the other. The experiment is based on the hypothesis states in a labor exchange the "input" of the employee is the perceived value of his labor, and the "outcome" is the perceived value of his remuneration. On the firm's side, the input is the perceived value of the remuneration, and the outcome is the perceived value of the labor. In the context of a wage contract, the perceived value of the labor input will equal the perceived value of the remuneration. The result of the experiment clarifies the hypothesis that a positive relationship between salary and effort has been observed in a large number of gift-exchange experiments. The use of equal wages elicits substantially lower efforts. This is not caused by monetary incentives per se because under both wage schemes it is profit‐maximizing for agents to exert high efforts. The treatment difference instead seems to be driven by the fact that the norm of equity is violated far more frequently in the equal wage. Therefore, the high wage was reciprocated by greater employee effort, making it profitable for employers to offer high wage contracts.

Work Field usage[edit]

The gift exchange theory behind the gift-exchange game directly extends the findings to the real world. The study indicates that employers apply gift exchange theory by increase salary is very robust towards the increasing size of the workforce, improving fairness, efficiency, reciprocity, maximizing utility, and profit.

See also[edit]


  1. ^ a b Akerloff, A. G.; Yellen, J. (1990). "The fair wage-effort hypothesis and unemployment". Quarterly Journal of Economics. 105 (2): 255–283. doi:10.2307/2937787. JSTOR 2937787.
  2. ^ a b Fehr, E.; Gächter, S. (1990). "Fairness and Retaliation: The Economics of Reciprocity". The Journal of Economic Perspectives. 14 (3): 159–181. doi:10.1257/jep.14.3.159.
  3. ^ Berg, Joyce; Dickhaut, John; McCabe, Kevin (July 1995). "Trust, Reciprocity, and Social History". Games and Economic Behavior. 10 (1): 122–142. doi:10.1006/game.1995.1027.
  4. ^ Ariely, Dan; Kamenica, Emir; Prelec, Dražen (September 2008). "Man's search for meaning: The case of Legos". Journal of Economic Behavior & Organization. 67 (3–4): 671–677. doi:10.1016/j.jebo.2008.01.004. hdl:10161/6324.
  5. ^ Tagiew, Rustam; Ignatov, Dmitry (2016). "Gift Ratios in Laboratory Experiments" (PDF). CEUR Workshop Proceedings. Vol-1627 (Experimental Economics and Machine Learning): 82–93.
  6. ^ Charness, Gary; Cobo-Reyes, Ramón; Jiménez, Natalia; Lacomba, Juan A; Lagos, Francisco (August 2012). "The Hidden Advantage of Delegation: Pareto Improvements in a Gift Exchange Game" (PDF). American Economic Review. 102 (5): 2358–2379. doi:10.1257/aer.102.5.2358.
  7. ^ Charness, Gary; Frechette, Guillaume R.; Kagel, John H. (June 2004). "How Robust is Laboratory Gift Exchange?". Experimental Economics. 7 (2): 189–205. doi:10.1023/B:EXEC.0000026979.14590.3c. S2CID 16908983.