All CDDRL Publications Journal Articles Journal of Economic Behavior & Organization Volume 191 Pages 714-737

When no bad deed goes punished: Relational contracting in Ghana and the UK

November 30, 2021

Experiment evidence to date indicates that subjects follow a trigger strategy in finitely repeated games: they punish bad contractual performance by reducing future offers and the threat of punishment disciplines opportunistic breach. This behavior contradicts standard game theory predictions. We conduct a repeated prisoner's dilemma (PD) game experiment with university students in Ghana and the UK. The experiment is framed as an employment contract. Each period the employer makes a irrevocable wage offer to the worker who then chooses an effort level. UK subjects use a trigger strategy to discipline workers, in line with previous experiments: wage offers reward high effort and punish low effort in the past; this induces workers to choose high effort; and gains from trade are shared between workers and employers. We find no such evidence with Ghana subjects: employers seldom reduce wage offers after low effort and, if they do, workers respond by lowering effort; employer often reduce wages after high effort; and employers earn a zero payoff on average. Introducing competition or reputation does not significantly improve workers’ effort. We conclude that the use of trigger strategies in repeated labor transactions is not a universally shared heuristic.