Welcome to our experiment! Please read the following instructions carefully. Your final payoffs will also depend on how good you have understood these instructions. You can ask questions anytime, just raise your hand. But please do not speak with other participants of the experiment any longer.
Overview
You participate in a study about the labor market. One half of all participants will be in the role of an employer, and one half of all participants will be in the role of an employee. Which role you take, will be decided randomly and you are informed about your role at the beginning of the actual experiment. You will keep your role until the end of the experiment.
The general structure of the experiment is the following: The employer offers a wage to her employee. The employee then decides whether he would like to accept this offer. If he accepts, he then has to decide how much effort he would like to exert. The higher his effort, the more his company benefits.
Another important aspect is that the employers’ earnings are not constant throughout the experiment. Every period, a bad market situation can occur for an employer with a probability of 1/3. Then, the employer’s earnings are lower than before.
The Details
The experiment consists out of 18 periods. In every period, you will be randomly matched with another participant of the experiment. The matching works such that you will never meet the same participant in two consecutive periods. Additionally, one employer is always exactly
B.4. INSTRUCTIONS 169 matched with one employee and no participant will ever learn the identity of his or her counterpart.
All of the 18 periods proceed in the following way:
Stage 1: (Contract Conclusion)
1. The employer makes a contract offer to her matched employee by choosing as a wage1 an integer between 30 and 100.
2. The employee initially has to decide whether he wants to accept this contract offer. If he declines the offer, both employer and employee learn their earnings in Stage 3 and for them this period is over. If he on the contrary accepts the offer, a contract is concluded, and the employee has to choose how much effort he would like to exert (whereof the employer is initially not informed about). Here, effort1 is a number between 1 and 10. The higher the effort is, the higher the employee’s costs are (compare the Table):
Effort 1 2 3 4 5 6 7 8 9 10
Costs 0 1 2 4 6 8 10 12 15 18
Importantly, a concluded contract is binding for the employee to the extent that he cannot withdraw form the contract in Stage 2, even if the employer changes the wage in Stage 2 Stage 2: (Potential contract changes)
At the beginning of the second stage, the computer randomly chooses two out of six employers.
Only for these two employers a bad market situation occurs, e.g. the earnings of these employers are reduced by 20 points. For all other employers no bad market situation occurs.
1. If a bad market situation occurs for the employer, she has the opportunity to change the existing contract, e.g. she can change her employee’s wage in any way. For this purpose, she choose as a wage2 again an integer between 30 and 100. Wage2 and wage1 can be totally different, but also the same values can be chosen for wage1 and wage2.
2. Because an existing contract is binding for him, the employee cannot withdraw from this contract and has to accept any wage change. But also the employee can change his effort in any way. For this purpose, he chooses as effort2 a number between 1 and 10 (costs are the same as in Stage 1 ). Effort2 and effort1 can be totally different, but also the same values can be chosen for effort1 and effort2.
Employers, for which no bad market situation occurs (and their matched employees) cannot change the contract concluded in Stage 1 and do not have to provide any input in Stage 2 and learn their earnings in Stage 3.
Stage 3: (Earnings)
Now, employees and employers are informed about their (period) earnings. If a contract has been concluded (Stage 1 ), the employer also learns her employee’s relevant effort level: Either effort2 in the case of a bad market situation or else effort1.
Payoffs
If a contract has not been concluded, the employer gets no earnings (= 0 points) in this period.
If a contract has been concluded, the following holds: In the case that no bad market situation has occurred wage1 and effort1 (initial contract conclusion) determine the employer’s earnings.
In the case that a bad market situation has occured, wage2 and effort2 (potential contract change) determine her earnings and these earnings are moreover 20 points lower:
Employer (no bad market situation) = (10 * effort1) - wage1 + 50 Employer (bad market situation) = (10 * effort2) - wage2 + 30
In both cases we have: The higher the employee’s effort level and the lower the wage, the higher the employer’s earnings are. Additionally, in both cases it holds that, if the formula leads to negative earnings, the employer gets 0 points. Hence, she can not make losses.
If a contract has not been concluded, the employee, contrary to the employer, gets positive earnings of 20 points.
If a contract has been concluded, the following holds: In the case that no bad market situation has occurred wage1 and the costs of effort1 (initial contract conclusion) determine the employee’s earnings. In the case that a bad market situation has occurred, wage2 and the costs of effort2 (potential contract change) determine his earnings:
Employee (no bad market situation) = Wage1 - costs of effort1 Employee (bad market situation) = Wage2 - costs of effort2
In both case we have: The higher the wage and the lower the effort (or rather the lower the costs of effort), the higher the employee’s earnings are.
At the end of the experiment, you will be be paid individually and confidentially. Your payoff will be the sum of all earnings gained in all periods. All points earned in the different periods will be converted in the following way: 35 points = 100 Eurocent.
Four Examples
1. Situation: Employer’s contract offer: Wage1 = 50; Employee declines offer!
Employer’s earnings = 0 points
B.4. INSTRUCTIONS 171 Employee’s earnings = 20 points
2. Situation: Employer’s contract offer: Wage1 = 30; Employee accepts offer and exerts effort1
= 1; A bad market situation does not occur (hence no contract changes) Employer’s earnings = 10 * 1 - 30 + 50 = 30
Employee’s earnings = 30 - 0 = 30
3. Situation: Employer’s contract offer: Wage1 = 50; Employee accepts offer and exerts effort1
= 5; A bad market situation does not occur (hence no contract changes) Employer’s earnings = 10 * 5 - 50 + 50 = 50
Employee’s earnings = 50 - 6 = 44
4. Situation: Employer’s contract offer: Wage1 = 50; Employee accepts offer and exerts effort1
= 5; A bad market situation occurs (Wage and effort are changed); Contract changes: Wage2
= 60; Effort2=7
Employer’s earnings = 10 * 7 - 60 + 30 = 40 Employee’s earnings = 60 - 10 = 50
Further course of events
When you have finished reading the instructions, please first try to deal with the additional example situations provided at your computer screen. Of course, you can ask questions at any time. When all participants have solved these situations correctly, three unpaid trial rounds follow in order to make you familiar with the different computer screens. For reasons of simplicity, the probability of a bad market situation is set to zero in these trial rounds. Afterwards, the 18 periods of the actual experiment start.
A last hint: Because a bad market situation really occurs randomly for employers, a single employer can be hit by such a bad market situation also in consecutive periods and then he may not be hit by such a situation for a longer period of time. Because every employer is exactly matched with one employee, this reasoning also holds for employees. Neither employees nor employers however know how often their counter-part has been hit by a bad market situation in the past.