Wage-Effort Game

Wage-effort game is a one-shot two-stage game, exhibiting notions of fairness, reciprocity and moral hazard.

The first mover, called employer, makes a wage offer in stage 1 of the game. The second mover, called worker, then in stage 2 chooses an effort level. Higher effort is more costly for the worker, but benefits the employer.

The Nash equilibrium for self-regarding preferences is to put in the minimum possible effort by the worker, since the wage does not depend on the level of effort. An employer, knowing this, offers the minimum wage needed to attract the worker.

Interesting extensions of the wage-effort game are its repeated version; a version with multiple workers that exhibits the free-riding problem; and comparison of the optimal contracts provided by the firm in case of unobservable versus observable effort.

Software

For a computerized version of the wage-effort game, go to Charles Holt's Reciprocity Game Software.

For further and more advanced readings see:

• Fehr, Kirchsteiger, and Riedl, "Does Fairness Prevent Market Clearing? An Experimental Investigation," Quarterly Journal of Economics, May 1993, 437-459.
• Mas-Colell Andreu, Whinston Michael D., Green Jerry G., Microeconomic Theory, Oxford University Press, New York, N.Y.,1995.