The discreet charm of the collective contract

Abstract

We compare individual with collective contracts using variations of a repeated gift- exchange game. Firms consist of one employer and three workers. In the individual variation (I) different workers can receive separate wages. In the collective variation (C) workers receive the same wage. I and C are played altering the order across sessions resulting in four treatments: 1I, 1C, 2I, 2C. The wage offered in the first period of 1C is significantly higher than the wage offered in the first period of 1I. Average wage and effort become indistinguishable in phase 1 afterwards. Individual contracts resulted on higher average effort but undistinguishable wages when comparing 2I with 2C. In spite of an experimental design favourable to individual contracts, collective contracts fared unexpectedly well.