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American Economic Review: Vol. 102 No. 5 (August 2012)

AER Volume. 102, Issue 5 | leftPrevious Article

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The Hidden Advantage of Delegation: Pareto Improvements in a Gift Exchange Game

Article Citation

Charness, Gary, Ramón Cobo-Reyes, Natalia Jiménez, Juan A. Lacomba, and Francisco Lagos. 2012. "The Hidden Advantage of Delegation: Pareto Improvements in a Gift Exchange Game." American Economic Review, 102(5): 2358-79.

DOI: 10.1257/aer.102.5.2358

Abstract

This paper analyzes the effect on performance and earnings of delegating the wage choice to employees. Our results show that such delegation significantly increases effort levels. Moreover, we observe a Pareto improvement, as the earnings of both employers and employees increase when employers delegate than when they do not. Interestingly, we also find that the employees' performance under delegation is higher than under nondelegation, even for similar wages. While there is strong evidence that behavior reflects strategic considerations, this result also holds for one-shot interactions. A possible nonstrategic motivation explaining the positive reaction to delegation is a sense of enhanced responsibility. (JEL J31, J33, J41)

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Authors

Charness, Gary (U CA, Santa Barbara)
Cobo-Reyes, Ramón (U Granada and Globe, Cartuja)
Jiménez, Natalia (U Granada and Globe, Cartuja)
Lacomba, Juan A. (U Granada and Globe, Cartuja)
Lagos, Francisco (U Granada and Globe, Cartuja)

JEL Classifications

J31: Wage Level and Structure; Wage Differentials
J33: Compensation Packages; Payment Methods
J41: Labor Contracts


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