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The Equity Principle in Employment Relationships

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The Selten School of Behavioral Economics

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Abstract

If you think of Reinhard Selten, you might first think of his outstanding contributions to game-theory which were honored with the Prize in Economic Sciences in Memory of Alfred Nobel in 1994. 1 At the same time, you might think of his devotion to the field of bounded rationality and his continual effort to promote the use of experiments in the Economic discipline (interestingly, his first journal publication in 1959 was not a theoretical, but an experimental paper featuring Cournot oligopoly models). 2 By jointly using theoretical and empirical methods, he wants “[...] to build up a descriptive branch of decision and game theory which takes the limited rationality of human behavior seriously.” 3 This aim is of utmost importance, because only then will we be able to develop worthwhile economic models that enable us to understand and predict how people behave in certain economic situations.

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Notes

  1. 1.

    Of course, if you know him better different things might come to your mind first, e.g., Esperanto, cats, or hiking in the Siebengebirge.

  2. 2.

    Sauermann and Selten (1959).

  3. 3.

    From Selten’s biography as reported in: Les Prix Nobel. The Nobel Prizes 1994, Editor Tore Frängsmyr, [Nobel Foundation], Stockholm, 1995.

  4. 4.

    Selten (1972)

  5. 5.

    cp. Selten (1978), Homans (1961), Adams (1963, 1965)

  6. 6.

    Selten’s article from 1978 also nicely illustrates the way he likes to work. He creates theories that explain actual economic behavior (i.e., experimental data), while being inspired by findings from surrounding areas of research (i.e., Biology, Psychology,…).

  7. 7.

    Efficiency here refers to the sum of payoffs. The formal payoff functions are as follows:

    Employer:

    $$ {{\pi }} = 20 + 5 + 15 e - w,\quad {{with}}\quad 10 < w \le 20 $$

    Employee:

    $$ {{\pi \,=\,}}w - {5} - {5}e $$
  8. 8.

    cp., e.g., Falk and Fischbacher (2006) for a model of reciprocity that incorporates intentions and distributional concerns.

  9. 9.

    See, e.g., Pfeffer and Langton (1993), Bewley (1999). In addition, consider that wage equality is also often referred to in employer-union bargaining as being a cornerstone of a fair wage scheme. Moreover, equal-wage payment is one of the most prevalent payment modes (e.g., Baker et al. 1988, Medoff and Abraham 1980).

  10. 10.

    Indeed, in real-life work relations, this is likely to happen quite frequently and it is likely to matter. Thus, if equity is important, the often-heard slogan “equal pay for equal work” implies “unequal pay for unequal work”.

  11. 11.

    There are, of course, other studies on this topic. For example, Charness and Kuhn (2007) use a setting where agents differ in their productivity. Gächter et al. (2008) investigate the effects of pay comparison information and effort comparison information in a multi-agent firm.

  12. 12.

    Remember that a higher effort implies higher effort costs and thus under equal wages translates into a lower payoff.

  13. 13.

    e.g., Loewenstein et al. (1989), Mowday (1991), Thöni and Gächter (2008).

  14. 14.

    The size of the baseline wage is already rather high in relation to what is usually paid for comparable jobs. Thus, workers might perceive both treatments, the baseline and the wage-raise, to be an advantageous norm violation – which might explain why there are no significant effort differences between these two treatments.

  15. 15.

    Of course, this is not to say that no other motives exist which are reconcilable with the observed behavior. See also our corresponding discussion in the last section.

  16. 16.

    Coincidentally, the experiments in Georg et al. not only shed light on the question at hand in this section, but furthermore they were funded by a research grant of Reinhard Selten and Eyal Winter. The experiments were actually designed to test the implications of a model by Winter (2004).

  17. 17.

    Due to space constraints, we would like to refer the interested reader to Winter (2004) or Goerg et al. (2010) for the details.

  18. 18.

    See also, e.g., Tricomi et al. (2010).

  19. 19.

    Which is why Selten usually tries to use as few free parameters as possible in his models – arguing (and joking) that with four parameters, he is already able to draw an elephant.

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Authors and Affiliations

  1. MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, D-53113, Bonn, Germany

    Sebastian J. Goerg

  2. Department of Economics, Institute for Empirical Research in Economics, University of Bonn, Adenauerallee 24-42, 53113, Bonn, Germany

    Sebastian Kube

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  1. Sebastian J. Goerg
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Correspondence to Sebastian Kube .

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Editors and Affiliations

  1. Magdeburg, Otto-von-Guericke-Universität, Magdeburg, 39106, Germany

    Abdolkarim Sadrieh

  2. Staatswissenschaftliches, (Volkswirtschaftliches) Seminar, Universität Köln, Albertus-Magnus-Platz, Köln, 50923, Germany

    Axel Ockenfels

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Goerg, S.J., Kube, S. (2010). The Equity Principle in Employment Relationships. In: Sadrieh, A., Ockenfels, A. (eds) The Selten School of Behavioral Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-13983-3_13

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  • DOI: https://doi.org/10.1007/978-3-642-13983-3_13

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