1 3. Respect and Relational Contracts

Abstract: Assuming that people care not only about what others do but also on what others think, we study respect in a labor market context where the length of the employment relationship is endogenous. In our three-stage gift-exchange experiment, the employer can express respect by giving the employee costly symbolic rewards after observing his level of effort. We study whether symbolic rewards are used by the employers mainly to praise employees or as a coordination device to build relational contracts. We find that a high proportion of long-term relationships have been initiated by the assignment of symbolic rewards. However, in the presence of either excess demand or excess supply of labor, the assignment of symbolic rewards decreases in the length of the relationship. This supports the notion that in these conditions employers use symbolic rewards mainly as a coordination device to initiate relational contracts. Receiving symbolic rewards increases the employees ’ likelihood of accepting to continue the relationship with the same employer. But when the market is not balanced, it also leads them to adjust their effort downwards as if interpreting symbolic rewards as signaling a lower risk of getting unemployed. Overall, the ability to assig