Paying it Forward in Experimental Labor Markets

This proposal extends the research on manager-employee exchange relationships in labor markets. Exchange models in a number of different disciplines provide tremendous insights into employment relationships that are characterized by high than market wages, positive HRM inducements and investments, reciprocal obligations, and higher work efforts (e.g., Charness, 2004; Fehr & Gächter, 2000; Shaw et al, 2009; Tsui et al, 1997). However, all these exchange models exclusively focus on the direct reciprocity between managers and employees. In contrast, the current proposal extends our common understanding about direct reciprocity in employment relationships by investigating paying-it-forward behavior in experimental labor markets. First, we suggest that paying it forward can be a type of employment relationship in which managers pay forward their bosses’ generosity or meanness to their own subordinates. Paying it forward can occur in labor markets because the philosophy that managers use to financially reward their own subordinates is likely to be influenced by how the managers have learned from and interpreted their past experiences with their previous bosses. For example, managers can be either appreciative or cynical when their bosses have paid them generously or ungenerously before. As a result, they may also provide similarly generous or ungenerous compensations to their own subordinates. Following this logic, we predict that highly paid and grateful managers are more likely to offer their own employees above the market rate compensation because they are more likely to believe in positive and mutually beneficial manager-employee relationships. Second, we suggest that direct reciprocity and paying it forward can coexist in labor markets because when managers pay forward generosity or meanness to their own subordinates, their subordinates will also reciprocate accordingly. In particular, when highly paid managers pay forward generosity to their own subordinates, they are also likely to expect subordinates to reciprocate positively by working harder. In addition, subordinates’ expectations and perceived reality of their manager’s generosity will jointly determine how they reciprocate their manager’s compensation. Finally, we will investigate both the bright and dark sides of paying-it-forward behavior in employment relationships. In particular, we suggest that when highly-paid managers are burdened with involuntary obligations to pay forward generosity to their subordinates, they may engage in ethically questionable behaviors to avoid paying subordinates generously. We plan to conduct three controlled behavioral experiments using modified gift exchange games (Charness, 2004; Fehr, et al., 1993; Fehr, et al., 1998) to test our hypotheses in experimental labor markets.