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Keywords:

  • reciprocity;
  • gift exchange;
  • employee incentives;
  • learning;
  • simulation;
  • decision making

Abstract

While traditional economic models characterize individuals as boundlessly self-interested, decades of empirical findings suggest that individuals' self-interest motives are constrained by concurrent preferences for fairness. Individuals act on these preferences by behaving reciprocally: rewarding others perceived as behaving fairly and punishing others perceived as behaving unfairly. Successful firms must learn to navigate environments characterized by the reciprocity of their transaction partners. This paper investigates firms' judgments about employee reciprocity and posits a dysfunctional learning process whereby firms that overestimate employee reciprocity learn to correct their beliefs through feedback, while those that underestimate employee reciprocity do not. The result, demonstrated through computer simulation, is a systematic bias toward an overemphasis on employee self-interest, and a resulting inefficiency in wage choices that hurts firm profitability. Copyright © 2011 John Wiley & Sons, Ltd.