Competition and Reciprocity Based Incentives

Abstract: The market competition literature verifies that firms provide stronger incentives to their managers to reduce costs in markets with more intense competition, even though profits become more volatile (Raith, 2003). Furthermore, when goods are substitutes, Cournot competition induces higher profits than Bertrand competition, but the type of competition becomes less important, the less related the goods are (Singh and Vives, 1984). In a laboratory experiment we find that gift-exchange emerges independently of the type and intensity of market competition. Whilst the competitive environment is a key factor for wage decisions and outcomes of principals, it has no direct impact on effort decisions of agents, which are mainly driven by wages. Beside that, individual characteristics (e.g. trust, loss aversion and reciprocity) are further key factors, which are influencing decisions and behavior in this gift-exchange setting.