A Gift-Exchange with Probabilistic Payoffs

Ample experimental evidence demonstrates a positive wage-effort relationship in which the results from the employee's effort lead to deterministic firm' payoffs. We thus investigate a reframed version of the gift-exchange game by Fehr et al. (1998) in which the firms' payoffs can take two values and one of them is randomly determined by an external process after the effort choice has been made. We find that effort levels are significantly lower when payoffs are probabilistic than when they are deterministic. As a consequence, high waging is profitable in the deterministic, but not in the probabilistic condition. Moreover, the treatment effect is strongest among firms which offer high wages