Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171099
Authors: 
Fahn, Matthias
Schade, Anne
Schüßler, Katharina
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6635
Abstract: 
We explore how inherent preferences for reciprocity and repeated interaction interact in an optimal incentive system. Developing a theoretical model of a long-term employment relationship, we first show that reciprocal preferences are more important when an employee is close to retirement. At earlier stages, repeated interaction is more important because more future rents can be used to provide incentives. Preferences for reciprocity still affect the structure of an employment relationship early on, though, because of two reasons: first, preferences for reciprocity effectively reduce the employee’s effort costs. Second, they allow to relax the enforceability constraint that determines the principal’s commitment in the repeated interaction. Therefore, reciprocity-based and repeated-game incentives are dynamic substitutes, but complements at any given point in time. We test our main predictions using data from the German Socio-Economic Panel (SOEP) and find evidence for a stronger positive effect of positive reciprocity on effort for older workers.
Subjects: 
reciprocity
relational contracts
dynamic incentives
JEL: 
C73
D21
D22
D86
D90
D91
Document Type: 
Working Paper
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