Gift-exchange game

The gift-exchange game, also commonly known as the gift exchange dilemma, is a common economic game introduced by George Akerlof and Janet Yellen to model reciprocacy in labor relations. The gift-exchange game simulates a labor-management relationship execution problem in the principal-agent problem in labor economics. The simplest form of the game involves two players – an employee and an employer. The employer first decides whether they should award a higher salary to the employee. The employee then decides whether to reciprocate with a higher level of effort (work harder) due to the salary increase or not. Like trust games, gift-exchange games are used to study reciprocity for human subject research in social psychology and economics. If the employer pays extra salary and the employee puts in extra effort, then both players are better off than otherwise. The relationship between an investor and an investee has been investigated as the same type of a game.

The gift exchange game serves as a valuable lens through which to understand economic theory as it demonstrates that self-interest maximization is not the sole determinant of economic decision-making. Rather, reciprocity is a fundamental factor that shapes individuals' behaviour in economic contexts. By simulating labor relations between an employer and employee, the game explicates that when employer offer a higher salary, employees are more inclined to reciprocate with great effort, leading to mutually beneficial outcomes. Gift exchange games have been used to study economic and social phenomena such as labor contracts, market transactions, strike and the decline of unionization. The gift-exchange theory also incorporates a social component, where homogenous agents who are employed with an equivalent wage level will exert greater effort. This then continues to result in a higher market efficiency and higher rent than those agents receiving different wages. The first examination of this component is referred to as the fair uniform-wage hypothesis, where experiments establish the significant efficiency premium of uniform wages. However, this is not a consequential result of a stronger level or reciprocity by the agents, although the reinforcement of endorsing these options on the side of principals with uniform wages is why implementing boundaries to freedom can lead to efficiency-enhancing results.