What is a fair wage? Reference points, entitlements and gift exchange

• We look at the effect of endogenous and exogenous wage setting institutions on wage offers and effort in the classic gift exchange experiments (Fehr et al., 1993).
• Workers first make wage proposals (cheap talk) in the endogenous wage setting institution. Wage offers marginally increase and average effort decreases relative to the baseline.
• An exogenously imposed minimum wage at the competitive outcome lowers average wage offers.
• Efficiency decreases in the minimum wage treatment while it marginally increases in the endogenous treatment.

We look at the effect of endogenous and exogenous wage setting institutions on wage offers and effort in the classic gift exchange experiments (Fehr et al., 1993). An exogenously imposed minimum wage at the competitive outcome lowers average wage offers. Workers do not negatively reciprocate and continue to offer high effort. In the endogenous wage setting institution, where workers first make wage proposals, wage offers increase marginally and average effort decreases relative to the baseline when wage proposals are not matched. Relative to the baseline, efficiency decreases in the minimum wage treatment while it marginally increases in the endogenous treatment. We find evidence that the institutional structure has important implications towards wage offers, effort and efficiency.