Worker characteristics and wage differentials: Evidence from a gift-exchange experiment

•We present causal evidence that employers tailor their contract offers to heterogeneous workers’ types.•This holds in the dimension of productivity and workers’ social preferences.•Employers pay significant wage premia for both traits.•Firms make highest profits with trustworthy workers, in particular with highly productive and trustworthy workers.•Output levels of trustworthy workers are higher and much less dispersed than those of not-trustworthy workers.

There is ample empirical evidence indicating that a substantial fraction of the population exhibits social preferences. Recent work also shows that social preferences influence the effectiveness of incentives in labor relations. Hence, when making contracting decisions, employers should take into account that workers are heterogeneous with respect to both their productivity and their social preferences. This paper presents causal evidence that they do. In a real-effort experiment, we elicit measures of workers’ productivity and trustworthiness and make this information available to potential employers. Our data show that employers pay significant wage premia for both traits. Firms make highest profits with trustworthy workers, in particular with highly productive and trustworthy workers. We also document differences in the strength of gift-exchange across worker types. In particular, output levels of trustworthy workers are higher and much less dispersed than those of not-trustworthy workers.