Stephen Leider

Gift Exchange in the Lab - It is Not (Only) How Much You Give...

An important aspect in determining the effectiveness of gift exchange relations in labor markets is the ability of the worker to “repay the gift” to the employer. To test this hypothesis, we conduct a real effort laboratory experiment where we vary the wage and the effect of the worker’s effort on the manager’s payoff. Furthermore we collect additional information that allows us to control for the workers’ ability and whether they can be classified as reciprocal or not. From our agency model of reciprocal motivation we derive non-trivial predictions about which is the marginal worker (in terms of ability) affected by our experimental variation and how different types of individuals, selfish and reciprocal, will react to it. Our model does substantially better than other theories in organizing the data.

Norms and Contracting

We argue that contracts establish the norms of a relationship and that individuals incur disutility when deviating from these norms. In a laboratory experiment, we allow agents to make simple contracts before they play one of four games, and the most effective contract always includes an unenforceable “handshake” agreement to take the first-best action. In three games, a contract with only this handshake agreement is (at least weakly) optimal. The handshake is particularly effective in games with strategic complements. Our results highlight an explanation for contractual incompleteness: establishing a norm can effectively substitute for weak enforceable restrictions. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

Kidneys for Sale: Who Disapproves, and Why?

The shortage of transplant kidneys has spurred debate about legalizing monetary payments to donors to increase the number of available kidneys. However, buying and selling organs faces widespread disapproval. We survey a representative sample of Americans to assess disapproval for several forms of kidney market, and to understand why individuals disapprove by identifying factors that predict disapproval, including disapproval of markets for other body parts, dislike of increased scope for markets and distrust of markets generally. Our results suggest that while the public is potentially receptive to compensating kidney donors, among those who oppose it, general disapproval toward certain kinds of transactions is at least as important as concern about specific policy details. Between 51% and 63% of respondents approve of the various potential kidney markets we investigate, and between 42% and 58% want such markets to be legal. A total of 38% of respondents disapprove of at least one market. Respondents who distrust markets generally are not more disapproving of kidney markets; however we find significant correlations between kidney market disapproval and attitudes reflecting disapproval toward certain transactions—including both other body markets and market encroachment into traditionally nonmarket exchanges, such as food preparation.

A Meeting of the Minds: Informal Agreements and Social Norms

Using coordination games, we elicit social norms directly for two different games where either an agreement to take the first best action has been reached or where no such agreement exists. We combine the norms data with separately measured choice data to predict changes in behavior. We demonstrate that including social norms as a utility component significantly improves predictive performance. Then we compare social norms to guilt aversion and lying aversion. We estimate that honoring an agreement in the double dictator game is worth giving up approximately 10% of total earnings and more than 120% in the Bertrand game. We show that informal agreements affect behavior through their direct effect on social norms as well as through an indirect effect on beliefs. This paper was accepted by Uri Gneezy, behavioral economics.

How Much is a Friend Worth? Directed Altruism and Enforced Reciprocity in Social Networks

We conduct field experiments in a large real-world social network to examine why decision-makers treat their friends more generously than strangers. Subjects are asked to divide a surplus between themselves and named partners at varying social distances, but only one of these decisions is implemented. We decompose altruistic preferences into baseline altruism towards strangers, and directed altruism towards friends. In order to separate the motives that are altruistic from the ones that anticipate a future interaction or repayment, we implement an anonymous treatment in which neither player is told at the end of the experiment which decision was selected for payment, and a non-anonymous treatment where both players are told the outcome. Moreover, in order to distinguish between different future interaction channels—including signaling one’s propensity to be generous and enforced reciprocity, where the decision-maker grants the partner a favor because she expects it to be repaid in the future—the experiments include games where transfers both increase and decrease social surplus. We find that decision-makers vary widely in their baseline altruism, but pass at least 50 percent more surplus to friends as opposed to strangers when decision-making is anonymous. Under non-anonymity, transfers to friends increase by an extra 24 percent relative to strangers, but only in games where transfers increase social surplus. This effect increases with the density of the social network structure between both players. Our findings are well explained by enforced reciprocity, but not by signaling or preference-based reciprocity. We also find that partners’ expectations are well attuned to directed altruism, but that they completely ignore the decision-makers’ baseline altruism. Partners with higher baseline altruism have friends with higher baseline altruism and, therefore, are treated better by their friends.We conduct online field experiments in large real-world social networks in order to decompose prosocial giving into three components: (1) baseline altruism toward randomly selected strangers, (2) directed altruism that favors friends over random strangers, and (3) giving motivated by the prospect of future interaction. Directed altruism increases giving to friends by 52 percent relative to random strangers, while future interaction effects increase giving by an additional 24 percent when giving is socially efficient. This finding suggests that future interaction affects giving through a repeated game mechanism where agents can be rewarded for granting efficiency enhancing favors. We also find that subjects with higher baseline altruism have friends with higher baseline altruism.

Bargaining in Supply Chains

We study experimentally bargaining in a multiple-tier supply chain with horizontal competition and sequential bargaining between tiers. Our treatments vary the cost differences between firms in tiers 1 and 2. We measure how these underlying costs influence the efficiency, negotiated prices, and profit distribution across the supply chain, as well as the consistency of these outcomes with existing theory. We find that the structural issue of cost differentials dominates personal characteristics in explaining outcomes, with profits in a tier generally increasing with decreased competition in the tier and increasing with decreased competition in alternate tiers. The balanced principal model of supply chain bargaining does a good job explaining our data, and it outperforms the common assumption of leader-follower negotiations. We find a significant anchoring effect from a firms first bid but no effect of the sequence of those bids, no evidence of failure to close via escalation of commitment, and mixed results for a deadline effect. We also find an interesting asymmetry between the buy and sell sides in employed bidding strategy. All firms make predominantly concessionary offers after the initial anchor; however, sell-side firms that engage in aggressive anticoncessionary bidding successfully increase prices while not compromising closure rates. Buy-side firms achieve much smaller price changes from anticoncessionary tactics and risk reduced closure, yielding no net benefit. This paper was accepted by Yossi Aviv, operations management.

Managerial Payoff and Gift Exchange in the Field

We conduct a field experiment where we vary both the presence of a gift exchange wage and the effect of the worker’s effort on the manager’s payoff. The results indicate a strong complementarity between the initial wage gift and the agent’s ability to “repay the gift”. We collect information on ability to control for differences and on reciprocal inclination to show that gift exchange is more effective with more reciprocal agents. We present a simple principal-agent model with reciprocal subjects that motivates our empirical findings. Our results offer an avenue to reconcile the recent conflicting evidence on the efficacy of gift exchange outside the lab; we suggest that the significance of gift exchange relations depends on details of the environment.

Contracts and Capacity Investment in Supply Chains

Suppliers are often reluctant to invest in capacity if they believe that they will be unable to recover their investment costs in subsequent transactions with buyers. In theory, a number of different contracts can solve this issue and induce first-best investment levels by the supplier. In this study, we investigate the performance of these contracts in a two-tier supply chain. We develop an experimental design where retailers and suppliers bargain over contract terms—and have the ability to make multiple back-and-forth offers—while also providing feedback on the offers they receive. One key result from our study is that an option contract and a service-level agreement are best at increasing first-best investment levels and overall supply chain profits. However, these same contracts also generate the largest inequity in expected profits between the two parties. We find that both of these results are driven by the bargaining tendencies of retailers and suppliers, which we refer to as “superficial fairness....

The Informational and Incentive Effects of Supplier Awards

Many firms recognize exceptional supplier performance by giving out a “Supplier of the Year” or “Outstanding Supplier” award. These awards are usually symbolic since they have no immediate monetary value for a supplier and no direct cost to a buyer. Giving these awards can be beneficial for a buyer: if the employees working for a supplier care about being rewarded, symbolic awards can incentivize a supplier to exert higher effort. On the other hand, in a market with multiple buyers and suppliers, an award may have another effect, which we denote “competition effect”. When an award is announced to other buyers indicating that a particular supplier is good, this can intensify a competition to do business with a good supplier. We develop a theoretical model that captures a supplier’s value for the award in a setting with two buyers and two suppliers. We show that the average provision of quality is higher when awards are available whether these are private (only observable to the recipient) or public (observable to everyone). In addition, public awards result in buyers paying a higher price to get a good supplier. We then test these results with a laboratory experiment. Our experimental results show that private symbolic awards have incentive effects and lead to higher provision of quality and higher buyer’s profits. When the awards are public this profit premium disappears. This happens for two reasons, first because buyers have to pay higher prices to get the good suppliers, and second because making the award public crowds out the intrinsic value of the award for suppliers. We also find that significant efficiency gains occur only when the award is private and the quality is public. This suggests that symbolic awards provide a noisy signal of a supplier’s type and therefore fail to capture the full efficiency gain of transparent transactions.

Ideation–Execution Transition in Product Development: An Experimental Analysis

Bringing a new product to market involves both a creative ideation stage and an execution stage. When time-to-market constraints are binding, important questions are how to divide limited time between the two stages and who should make this decision. We introduce a laboratory experiment that closely resembles this setting: it features a product development task with an open design space, a downstream cost increase, and two development stages. We show that performance is significantly worse when designers choose for themselves when to transition from ideation to execution and that decision control explains a large share of performance variation even after controlling for individual differences. How the time is allocated between ideation and execution does not affect mean performance, but later transition increases risk. One driver of poor design outcomes in the designer-initiated transition regime are delays in physical construction and testing of designs. We show that such delays can be prevented by “nudg...