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Shocks and Relationships (No. E2008007)


Ninghua Du* and Maroš Servátka¤#
September 6, 2008

Abstract: In this paper we experimentally study what happens to the long-term relationship between a firm and a worker when the firm's profitability is affected by exogenous revenue shocks. While we find that shocks had no significant effect on wages and a little effect on relationships, we observe their significant effect on effort levels: Given the same wage, the workers exert lower effort in Shocks comparing to No Shocks. Hence, the presence of shocks in our experiment decreases market efficiency.
Keywords: Gift exchange, experiment, exogenous shocks

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* Department of Economics, SHUFE. E-mail address:

¤ Department of Economics, University of Canterbury, Private Bag 4800, Christchurch, New Zealand, 8015; phone: 64-3-3642825; fax: 64-3-3642635; e-mail:
# We thank Bram Cadsby, Jim Cox, Martin Dufwenberg, Price Fishback, Tibor Neugebauer, Sam Peltzman, Ron Oaxaca, seminar participants at the University of Heidelberg and participants of ESA meetings in Atlanta, Osaka, and Shanghai for valuable insights and suggestions. All remaining errors are our own. The research funding was provided by the University of Arizona Economic Science Laboratory and SHUFE.