We study whether behavior in experimental gift-exchange markets with repeated interaction is affected by market conditions. One issue we consider is the impact of competitive imbalance, by varying whether there is an excess supply of firms or an excess supply of workers in the market. Workers might react differently to high wage offers in the two cases, as it may seem that firms are ‘forced to be generous’ by competitive pressures when there are excess firms. Our second issue concerns the effect of requiring a minimum wage, another sense in which a firm may seem ‘forced to be generous’. We impose a minimum wage in the market with an excess supply of workers, and study the overall effect on wages and productivity. While our data show strong deviations from the standard game-theoretic prediction, the patterns of behavior are not fully consistent with either kindness-based models of positive reciprocity or models of distributional utility. The state of competition does not appear to have strong effects in our data; however, there is some evidence of lower productivity when a minimum wage is imposed. Finally, we also present data from single-period sessions that show substantial gift exchange even without repeated interactions.

In experiments with two-person sequential games we analyze whether responses to favorable and unfavorable actions depend on the elicitation procedure. In our 'hot' treatment the second player responds to the first player's observed action while in our 'cold' treatment we follow the 'strategy method' and have the second player decide on a contingent action for each and every possible first player move, without first observing this move. Our analysis centers on the degree to which subjects deviate from the maximization of their pecuniary rewards, as a response to others' actions. Our results show no difference in behavior between the two treatments. We also find evidence of the stability of subjects' preferences with respect to their behavior over time and to the consistency of their choices as first and second mover.

This paper presents evidence that the willingness to punish an unfair action is sensitive to whether this action was preceded by a deceptive message. One player first sends a message indicating an intended play, which is either favorable or unfavorable to the other player in the game. After the message, the sender and the receiver play a simultaneous 2x2 game, in which the sender may or may not play according to his message. Outcome cells may, hence, be reached following true or false messages. In the third stage the receiver may (at a cost) punish or reward, depending on which cell of the simultaneous game has been reached. We test whether receivers’ rates of monetary sacrifice depend on the process by which an outcome is reached. We study two decision-elicitation methods: the strategy and the direct response methods. For each method, deception more than doubles the punishment rate as a response to an action that is unfavorable to the receiver. We also find evidence that 17-25% of all participants choose to reward a favorable action choice made by the sender, even though doing so leaves one at a payoff disadvantage. Our results reflect on current economic models of utility and have implications for organizational decision-making behavior.

While the theoretical industrial organization literature has long argued that excess capacity can be used to deter entry into markets, there is little empirical evidence that incumbent firms effectively behave in this way. Bagwell and Ramey (1996) propose a game with a specific sequence of moves and partially-recoverable capacity costs in which forward induction provides a theoretical rationalization for firm behavior in the field. We conduct an experiment with a game inspired by their work. In our data the incumbent tends to keep the market, in contrast to what the forward induction argument of Bagwell and Ramey would suggest. The results indicate that players perceive that the first mover has an advantage without having to pre-commit capacity. In our game, evolution and learning do not drive out this perception. We back these claims with data analysis, a theoretical framework for dynamics, and simulation results.