equilibrium selection in an experimental macroeconomy author affiliation vivian lei department of economics university of wisconsin milwaukee milwaukee wi 53201 usa vlei uwm edu corresponding authorcharles n noussair department of economics faculty of economics and business tilburg university p o box 90153 5000 le tilburg the netherlands c n noussair uvt nl acknowledgment we are grateful to the college of letters and science and center for research on international economics at the university of wisconsin milwaukee for financial support we thank colin camerer katarina kellar lutz hendricks nazrul islam tomomi tanaka filip vesely and two anonymous referees for helpful comments 1 introductionone of the most influential literatures in economics is the theory of growth for surveys see azariadis 1993 barro and sala i martin 1995 romer 1996 sala i martin 2002 the basis of much of the literature is the ramsey 1928 cass 1965 koopmans 1965 growth model in this model the economy is assumed to behave like a benevolent social planner who chooses capital stock and consumption levels over an infinite time horizon with the goal of maximizing the discounted utility of the consumption stream the principal result of the model is that consumption and capital stock converge to unique optimal steady state levels that are independent of the initial endowment and the utility function of the social planner an implication of the model therefore is that different countries would converge toward a common income level even if their initial endowment of capital differed provided that they have access to the same production technology relatively poor countries would exhibit higher growth rates than richer ones these two predictions are testable with field data however field studies have generally failed to support the hypothesis of convergence toward a common income level see durlauf and quah 1999 temple 1999 and islam 2003 for surveys rather the data are more consistent with the alternative hypothesis of club convergence baumol 1986 which postulates that a small number of steady states exist and that each country has a tendency to converge toward one of them 1 such a framework can explain the observed pattern over time of an increase in income differences between the organisation for economic cooperation and development countries and the developing world as well as a decrease in the differences within each of the two groups the empirical support for club convergence has encouraged the development of theoretical models with multiple equilibria while some countries may reach optimal equilibria unfortunate countries might find themselves in low income equilibria which are often labeled as poverty traps these countries are unable to reach a better equilibrium without coordination originally due to rosenstein rodan 1943 the insight that the existence of multiple equilibria might provide an explanation of international income differences has led to a literature that considers a variety of growth models with multiple equilibria for example azariadis and drazen 1990 construct an overlapping generations model with two stable pareto rankable equilibria in the inferior equilibrium no agent trades with members of other generations murphy shleifer and vishny 1989 build a model with synergies between industries each industry is profitable only if other industries are operating and there are equilibria where all of the industries operate and other pareto dominated equilibria where none operate galor and zeira 1993 and banerjee et al 2001 show that inequality and differential access to credit can keep an economy in a pareto dominated equilibrium recognizing whether or not an economy has multiple equilibria is important because policy prescriptions differ depending on whether an economy is in an inferior equilibrium or whether it is in an equilibrium that is unique

gift exchange and the separation of ownership and control abstract numerous gift exchange experiments have found a positive wage effort relationship in almost all these experiments the employer both owns and controls the firm this paper explores to what extent the separation of ownership and control affects the wage effort relationship we compare the standard bilateral gift exchange game between an owner manager and a worker with two trilateral ones where the firm is owned by a shareholder and controlled by a manager the wage effort relationship is similar in all three situations most strikingly workers reward higher wages with higher effort even when the manager does not share in the firm s profits

sick pay provision in experimental labor markets sick pay is a common provision in most labor contracts this paper employs an experimental gift exchange environment to explore two related questions using both managers and undergraduates as subjects first do workers reciprocate sick pay in the same way as they reciprocate wage payments second do firms benefit from offering sick pay firms may benefit in two different ways directly from workers reciprocating higher sick pay with higher efforts and indirectly from self selection of reciprocal workers into contracts with higher sick pay our main finding is that the direct effect is rather weak in terms of effort and negative in terms of profits however when there is competition among firms for workers sick pay can become an important advantage consequently competition leads to a higher provision of sick pay relative to a monopsonistic labor market

minimum wage restrictions and employee effort in incomplete labor markets an experimental investigation abstract a minimum wage raises average wages along with modest increases in employees average effort levels generating a pareto improvement in social welfare the minimum wage reduces effort in the neighborhood of the minimum but has no systematic effect on effort levels at higher wages as a consequence average effort increases modestly with a minimum wage as it raises average wages similar results are reported within groups both when introducing and eliminating a minimum wage although the within group effects of introducing a minimum wage are stronger than dropping it

partial gift exchange in an experimental labor market impact of subject population differences productivity differences and effort requests on behavior we report a gift exchange experiment firms make wage offers workers respond by determining an effort level higher effort is more costly to workers and firms have no mechanism for punishing or rewarding workers consistent with the gift exchange hypothesis workers provide more effort at higher wages but undergraduates provide substantially less effort than mbas evidence suggests this results from differences in prior work experience firms nonbinding effort requests are at least partially honored resulting in increased overall effort for undergraduates although higher wages are relatively more costly for lower productivity firms workers do not provide them with more effort

are income and consumption taxes ever really equivalent evidence from a real effort experiment with real goods abstract the public finance literature demonstrates the equivalence between consumption and labor income wage taxes we introduce an experimental paradigm in which individuals make real labor leisure choices and spend their earned income on real goods we use this paradigm to test whether a labor income tax and an equivalent consumption tax lead to identical labor leisure allocations despite controlling for subjects work ability and inherent labor leisure preferences and disallowing saving subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax we discuss the economic implications of a policy shift to a consumption tax

financial development institutions and poverty alleviation an empirical analysis abstractthe aim of this article is to analyse empirically whether the level of institutional quality influences how financial development affects poverty for a sample of developing countries covering the period from 1984 to 2012 using an interaction term constructed as a product between financial development and institutional quality we find that the pro poor impact of financial development decreases as the quality of institutions rises such a differential effect can be ascribed to the capacity of banks to provide functions that mimic those performed by an institutional framework that works well the results of this article can be used for policy management

finance and income inequality what do the data tell us although there are distinct conjectures about the relationship between finance and income inequality little empirical research compares their explanatory power we examine the relationship between finance and income inequality for 83 countries between 1960 and 1995 because financial develop ment might be endogenous we use instruments from the literature on law finance and growth to control for this our results suggest that in the long run inequality is less when financial development is greater consistent with galor and zeira 1993 and banerjee and newman 1993 although the results also suggest that inequality might increase as financial sector development increases at very low levels of financial sector development as suggested by greenwood and jovanovic 1990 this result is not robust we reject the hypothesis that financial development benefits only the rich our results thus suggest that in addition to improving growth financial development also reduces inequality

in search of workers real effort reciprocity a field and a laboratory experiment we present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages work effort neither reacts to an increase of the own wage nor to a positive or negative peer comparison this result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort in an additional real effort laboratory experiment we show that explicit cost and surplus information that enables an exact calculation of an employer s surplus from the work contract is a crucial prerequisite for a positive wage effort relation this demonstrates that an employee s reciprocity requires a clear assessment of the surplus at stake jel c91 c92 j41

on the role of social wage comparisons in gift exchange experiments this study extends a bilateral gift exchange experiment by clark et al 2010 we investigate how the provision of either quantitative or qualitative information on the average wage paid in all worker employer relationships impacts the wage set by employers and worker performance we find that information on the average wage reduces increases both wage offers and effort levels in one shot repeated relationships

involuntary unemployment and non compensating wage differentials in an experimental labour market in this paper the authors report the results of a series of efficiency wage experiments some of the key predictions of the efficiency wage hypothesis are qualitatively confirmed by the data higher wages caused a reduction in shirking firms offered contracts which exhibited positive job rents firms offered systematically different wages and job rents which gave rise to noncompensating income differentials and endogenous involuntary unemployment occurred copyright 1996 by royal economic society

gift exchange in a multi worker firm one of the main findings of a large body of gift exchange experiments is that in an incomplete contracts environment workers on average do not shirk and usually provide more than the minimum enforceable effort level in general 40 to 60 percent of the workers reward higher wages with higher effort these results are observed for simple one employer one worker relationships in this paper we investigate whether they generalize to the more realistic situation in which the employer employs several workers we compare a bilateral gift exchange game with a treatment in which each employer has four workers we find that effort levels in the latter treatment are only marginally lower gift exchange thus appears to be robust to increases in the size of the workforce and intention based reciprocity rather than social preferences seems to be the main driving force behind gift exchange

a collection of surveys on market experiments this paper highlights the contributions in this special issue to the very large and rapidly growing research on experimental markets it contains ten surveys of different streams of research in this area including asset markets contests environmental policy frictions general equilibrium labor markets multi unit auctions oligopoly markets and prediction markets

transparency and reciprocal behavior in employment relations abstract the impact of transparency on the extent of reciprocal behavior is investigated in a simple repeated gift exchange experiment where principals set wages and agents respond by choosing effort levels that with a random component determine principals payoff it is shown that direct reciprocal behavior is much stronger in a more transparent situation where efforts are revealed to the principals however there is no significant impact of transparency on average effort as non transparency leads to a stronger diversity in behavioral patterns such that at the same time the frequency of very low and very large effort levels increases

positive and negative reciprocity in the labor market abstract traditional gift exchange experiments were designed with corner equilibria so that evidence of positive reciprocity could not be disentangled from one sided errors our first treatment replicates the traditional design and finds that effort is an increasing function of wage for mid range wage offers but this relationship is not significant for high and low offers the second treatment has an interior equilibrium asymmetric marginal costs of reciprocity positive and negative and lower efficiency gains there is evidence of a decrease in the deviations from the subgame perfect nash equilibrium however there is still significant reciprocal behavior positive and negative

panel evidence on finance institutions and economic growth this article investigates whether the level of institutional development affects the link between financial development and economic growth using a range of cross sectional and panel approaches we find that the positive effect of banking development on growth is reduced as the level of institutions e g rule of law lack of corruption increases we do not however find a similar result when we examine the joint effect of institutional level and stock market development on economic growth we attribute these results to the ability of banks to perform functions similar to those provided by well operating institutions whereas stock markets do not perform such comparable functions

production trade prices exchange rates and equilibration in large experimental economies we study market equilibration in laboratory economies that are larger and more complex than any that have been studied experimentally to date complexity is derived from the fact that the economies are international in economic structure with multiple input output and foreign exchange markets in operation the economies have twenty one markets and due to the fact that they have roughly fifty agents the economies are characterized by several hundred equations in spite of the complexity and interdependence of the economy the results demonstrate the substantial power of the general equilibrium model of perfect competition to predict the direction of movement of market level variables empirical patterns in the convergence process are explored and described

respect and relational contracts abstract assuming that people care not only about what others do but also on what others think we study respect in a labor market context where the length of the employment relationship is endogenous in our three stage gift exchange experiment the employer can express respect by giving the employee costly symbolic rewards after observing his level of effort we study whether symbolic rewards are used by the employers mainly to praise employees or as a coordination device to build relational contracts by manipulating the balance between labor demand and supply in the market we find that a high proportion of long term relationships have been initiated by the assignment of symbolic rewards however the assignment of symbolic rewards decreases when it becomes clear that the relationship is durable suggesting that employers mainly use symbolic rewards as a coordination device to initiate relational contracts compared to the balanced market condition assigning symbolic rewards in initial relationships is less likely when there is excess demand in the market and more likely when there is excess supply i e when the relationship is more valuable receiving symbolic rewards increases the employees likelihood of accepting to continue the relationship with the same employer it also motivates them to increase their effort further but only when the market is balanced overall the ability to assign symbolic rewards does not give rise to higher profits because it is associated with lower rents offered to the employees on average leading to lower effort levels

does the wage tax system cause budget deficits a macro economic experiment in this paper we investigate experimentally the economic functioning of a wage tax system for financing unemployment benefits in an international economy in particular in reaction to budget deficits and tax adjustment our results support the hypothesis that due to out of equilibrium price uncertainty producers are reluctant to employ inputs we also observe a downward pressure on wages exacerbated by an over supply of labor by consumers these observations can explain the budget deficits found furthermore we find that tax adjustments in order to facilitate a balancing of the budget has strong adverse effects on unemployment and real gdp

does financial development contribute to poverty reduction the article examines the contribution of financial development to poverty reduction in developing countries building on earlier research which has established links between financial development and economic growth and between economic growth and poverty reduction the article tests for a causal process linking financial sector growth and poverty reduction the empirical results indicate that up to a threshold level of economic development financial sector growth contributes to poverty reduction through the growth enhancing effect the impact of financial development on poverty reduction will be affected however by any change in income inequality resulting from financial development

the expectations hypothesis of the term structure tests on us german french and uk euro rates abstract this paper tests the expectations hypothesis of the term structure on us german french and uk euro rates three tests are examined the first is based on forward rates and the other two are based on the interest rates spread first we show that the sign puzzle highlighted by campbell and shiller campbell j y shiller r j 1991 yield spreads and interest rate movements a bird s eye view review of economic studies 58 495 514 for us data does not arise in the cases of french and uk short term rates second we propose tests for the expectations hypothesis based on error correction models with these tests the sign puzzle disappears but the country puzzle remains

pay secrecy and effort provision i introduction pay secrecy norms are widespread in many organizations a survey of 2 700 u s employees conducted in autumn 2010 found that almost 1 out of 2 employees face limitations to the extent to which they can access information about other employees compensation 1 similarly a recent survey of u s employers found that over one third of private sector organizations have in place formal rules prohibiting employees to discuss their pay with co workers reported in gely and bierman 2003 a common argument used to justify the adoption of pay secrecy is that it helps minimize the negative effects arising when employees compare their pay with the pay of their co workers colella et al 2007 2 pay comparisons are in fact thought to be a key factor in employees judgments of the fairness of their pay e g akerlof and yellen 1990 discovering the existence of pay differentials between oneself and co workers who are in comparable positions within the firm may spur perceptions of unfairness and reduce job satisfaction card et al 2012 this may ultimately lead to reduced work morale and lower effort whereas this conjecture finds considerable support among managers and compensation executives e g agell and lundborg 1995 bewley 1999 campbell iii and kamlani 1997 there is limited direct evidence that the availability of pay comparison information has detrimental effects on effort behavior 3 in this paper i use laboratory experiments to provide a controlled test of this proposition the experiments reported in this paper are based on a multilateral version of the gift exchange game fehr kirchsteiger and riedl 1993 in the standard bilateral gift exchange game a first mover the employer decides on the size of the gift wage she sends to a second mover the employee who can in turn reciprocate by choosing costly actions effort that reward the first mover a typical result of bilateral gift exchange game experiments is that employees are often willing to incur costs in order to reward employers who have treated them favorably for reviews of the experimental literature see fehr goette and zehnder 2009 and charness and kuhn 2011 in the multilateral version of the game used in this study described in detail in section ii the employer interacts with two employees at the same time and pays a wage to each of them employees receive their wage and then independently choose an effort level i observe effort choices in three different conditions in a first condition employees only learn their own wage while coworkers wages remain undisclosed i use this benchmark condition to assess how employees respond to given levels of the own wage under a wage secrecy regime in two other conditions i remove any limitation on the availability of information about other workers wages in these treatments employees are fully informed of the wage paid to co workers when they choose effort by comparing these public wages treatments with the wage secrecy treatment i can test whether the availability of pay comparison information is detrimental for effort provision the two public wages treatments differ in how wages are determined in one treatment the employer can choose the two wages she pays to the employees while in the other treatment the wage paid to one employee is mandated exogenously by the experimenter this allows to study the effect of pay comparisons in settings where the employer has full discretion on the firm s wage structure as well as in settings where an employer s wage policy is partly constrained by exogenous labor market regulations such exogenous constraints to firms wage policies are commonplace in natural workplaces e g minimum wage laws centralized pay regulations etc and previous experiments have shown that they can affect pay fairness considerations and effort behavior in important ways 4 differently from previous studies which either focused on bilateral labor relations or studied multilateral relations where workers received no information about the treatment of co workers in this experiment i study how employees effort is influenced by labor market regulations that affect the wage of their co workers

social comparison and performance experimental evidence on the fair wage effort hypothesis we investigate the impact of wage comparisons for worker productivity we present three studies which all use three person gift exchange experiments consistent with akerlof and yellen s 1990 fair wage effort hypothesis we find that disadvantageous wage discrimination leads to lower efforts while advantageous wage discrimination does not increase efforts on average two studies allow us to measure wage comparison effects at the individual level we observe strongly heterogeneous wage comparison effects we also find that reactions to wage discrimination can be attributed to the underlying intentions of discrimination rather than to payoff consequences

linkages between financial deepening trade openness and economic development causality evidence from sub saharan africa summary this contribution tests for causality between financial deepening trade openness and economic development for 16 sub saharan african countries the hsiao granger method is used to add to the existing empirical evidence only limited support is found for the popular hypothesis of finance led growth in general the evidence indicates that financial deepening and trade openness have swayed economic development rather marginally in particular the investigated countries have failed to benefit from financial deepening development strategies prioritizing financial or trade sector development hence cannot be supported

experimental labor markets and policy considerations incomplete contracts and macroeconomic aspects this survey focuses on experimental labor markets investigating two aspects that are important for a better understanding of labor market relations and their consequences for labor market policies the first part of the survey is dedicated to papers that assess the prevalence of reciprocal considerations in incomplete labor contracts the second part summarizes the relatively small but growing experimental literature exploring labor market issues in macroeconomics and public finance studying the interaction between taxation and labor market outcomes

reciprocity under brief and long time delays we report the results from three experiments embedded in the same overarching design which extends the gift exchange paradigm for the study of worker employer relationships we focus on the effect of the length of the delay between the time at which workers learn their wage and when they choose an effort level on the relationship between wage and effort we compare effort choices made within a few hours with those made several weeks afterward we find that the strength of the wage effort relationship decreases over time and this change appears to be driven by workers who receive low wages jel c91 j33 m52

competition and relational contracts the role of unemployment as a disciplinary device when workers are faced with the threat of unemployment their relationship with a particular firm becomes valuable as a result a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party but can relational contracts motivate high effort when workers can easily find alternative jobs we examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market we show that effective relational contracts do emerge in a market with excess demand for labor long term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment however stronger competition for labor does not impair labor market efficiency higher wages induced by competition lead to higher effort out of concerns for reciprocity

reference points and effort provision a key open question for theories of reference dependent preferences is what determines the reference point one candidate is expectations what people expect could affect how they feel about what actually occurs in a real effort experiment we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision we find that effort provision is significantly different between treatments in the way predicted by models of expectation based reference dependent preferences if expectations are high subjects work longer and earn more money than if expectations are low