Shocking gift exchange

We study how a gift exchange labor market reacts to the occurrence of negative shocks. One-round shocks may hit either workers’ wages or employers’ earnings (via worker productivity). In our model, other-regarding preferences suffice predict and above competitive level. Wage rigidity is predicted if we add wage illusion loss aversion. Using real-effort laboratory experiment, find support for model. When there are no shocks, exchange. After shock see strong nominal impact on effort, as predicted. Rigidity also observed after productivity shock, but here do observe increases in especially at low wages. The latter contrary model predictions suggests that alter gift-exchange patterns. conclude often field can be explained by boundedly rational workers with social preferences.