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

42 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 and test the predictions of three competing models of gift exchange: Classical (CGE); Augmented (AGE) based on unexpected wage surprises; and Belief-based (BGE) that uses belief hierarchies to formally model reciprocity and guilt-aversion. Following Akerlof (1982), we also introduce signals of the typical wage, θw, and effort level, θe, in similar firms. We examine the worker’s optimal effort in response to exogenous variation in the wage, w, the signals θw, θe, and a signal of the firm’s expectations of effort from the worker, s. All three models predict gift exchange, however, the predictions of the AGE and the CGE models with respect to θw, θe, and s, are rejected. The BGE model successfully explains the data in all these respects. Gift exchange is underpinned by guilt-aversion. We also provide novel empirical evidence of first order stochastic dominance of first and second order 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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