Okay, back. So we were here. And now let's continue to the field where reciprocity matters
a lot. And that is inside the firm. As you may know, I guess most of you know that, there
are definitions of why a firm exists, the theory of the firm. There's this property
rights approach that you need a residual claim such that you can avoid shirking and you maximize
the outcome of specific investments into relations. And therefore, the more specific investments
are in terms, most of the case in terms of human capital investments, the more specific
these investments are, the less you go to a firm and the more you go to a market. But
if these investments are very little specific, then you choose to organize everything inside
the firm. There is a theory of that stuff that has to do with experiments, but not in
this course here. Then there are second approaches, of course, this transaction cost approach.
You need always a lawyer to organize everything over the market, reduce this cost. Therefore,
we go inside the firm. Therefore, we have sometimes firms and sometimes we organize
everything over the market. This is also not very much behavioral. The third element that
was introduced by Akalov and co-authors to that, and therefore Akalov got the Nobel Prize,
is that Akalov said, okay, we need a firm because inside the firm, we can materialize gains from
trust and reciprocity. Therefore, the firm exists and therefore we see so many firms outside.
So this is the third definition of why there is a firm. And this has to do with this mutual gift
exchange and experiments and reciprocity. Yeah, this is basically here, the story behind that
theory. So traditionally, wages only cover the cost. But most of the time contracts are incomplete
and this makes the worker super adaptive to the situation. So the unforeseen event that takes
place. And therefore, without a lot of specifications inside the contract, labor inside of the firm is
very attractive. But this relies on reciprocity. The firm only gives additional money on top of
covering the cost of labor and the worker reciprocates positively by adjusting the
action to what is needed in case of an unforeseen event or an unspecified event.
And that is called the mutual gift exchange approach.
Now you test that, this nice little mutual gift exchange game that is basically the invention by
Antsphere. Unfortunately, this is not that. Antsphere is the big player here in this field.
And he and co-authors did tons of super nice experiments on that. In the general form,
in the most basic form, there's a principal. He or she can offer a wage. The agents accept that
or not if this is a mean offer from his or her perspective. And then the agent can work.
And the principal may offer something or may formulate something, a wish that the agent
follows in terms of how much effort the agent invests. But he, the principal cannot
pre-determine the effort of the agent because the agent is somewhere working outside
the factory or it's too difficult to observe the agent and so on and on.
But on the other hand, the more effort the agent invests, the higher the labor cost.
So positive reciprocation means that the principal offers a lot of wage. Therefore,
the agent works a lot and both gain from that. And then there are tons of variations to this.
Here's a very rather old publication on that thing where they just show in two
countries for whatever reason that the higher the wage, the higher is the effort and so on.
Here are some, from my perspective, seminal extension to that. First, you have competition
among the workers. Thus, competition eliminates the premium, so the effort
and the overpayment. And what you see is that even if you repeat that,
there is always reciprocity. So competition reduces reciprocity but cannot eliminate that.
So here we see the positive correlation between the wage and the effort even under
competition. And you see here and co-authors, they all are now
whole chairs at prominent universities. So that was a super influential series of experiments.
The second answer, I was way ahead, so this was just a repetition. So
if you repeat the game, this repetition kills that, no. And here comes the second extension.
If you have competition among the agents, thus competition wipe out this extra payment that
the principals offer in terms of extra wage and then as a consequence destroy the extra effort by
the agent. And here they take three important tricks in terms of the information that they
provide on the market. First, they have an identification number that changes
across the period, so you cannot observe the person over periods. Or they have a fixed
identification number, so you can track this person over the period. And third, just for
comparison, they have the market where everything can be fixed such that the principal can predict
the effort level. So this is the ideal case. There is no reciprocity needed, so
you accept a work contract and this contract also pre-specifies the effort level. There is no
comparison, there's no reciprocity, but we can compare now those two contracts where the effort
level is not fixed, we can compare that effort level to the pre-specified effort level.
And here, of course, there is an ongoing relation, so this is the firm, and this is,
so to speak, the market where you cannot trace people over periods. And so we can see
how successful is the firm in comparison to the ideal case and how successful is the market
in comparison to the ideal case. There is a sub-game perfect equilibrium
and it predicts no reciprocity, full stop, or the minimum reciprocity to the minimum wage possible.
But what you observe is that, so this is the ideal case with pre-specified wages,
and this is the market, and this is inside the firm. And what you see is that inside the firm,
they pay extra cost, so the principal has extra cost, but there's good reason that the principal
has extra costs because there's also extra effort. So this is the extra effort, so this is the effort
inside the firm, this is the ideal case where the effort is predetermined, and this is the market
effort. And what you see is, yeah, there's an extra wage and there is an extra effort resulting from
that, so people reciprocate with competition over several periods inside the firm. So this
is the ideal result that we would like to see here, and they published this also at the top.
So this was the stuff that I wanted to tell you about reciprocity, so let me stop for a moment.