Jones Faculty Lecture by Joaquin Gomez-Minambres, Associate Professor of Economics

Incomplete Contracts and Reciprocity in the Workplace

Standard economics typically assumes that workers’ performance is observable, verifiable, and hence contractible. In reality, however, labor contracts are incomplete. Thus, it is difficult to monitor what workers do, and there are aspects of the job that cannot be codified or linked to a worker’s pay in an enforceable way. Because of contractual incompleteness, employment cannot be fully based on explicit incentives incorporated in legally binding agreements. Instead, it must often rely on implicit shared understandings in which employers and workers expect each other to do their part. When employers live up to these expectations, workers typically respond by going above and beyond; but when they don’t, they retaliate by working less or lowering the quality of their work. This is the essence of reciprocity in the workplace. In this lecture, I will discuss case studies, behavioral theories, and experiments from my teaching and research explaining how reciprocity works as well as the ways in which these lessons can be used to promote better labor relations.