LAUSR

This laboratory experiment analyzes employer–employee relations in the face of an exogenous shock. We implement a two-period gift-exchange game in which the employer can be hit by an adverse shock in the second period. We find that the mere possibility of the shock encourages employers to pay significantly higher wages in the first period. These higher first period wages translate into increased effort levels in the second period, independent of the actual occurrence of the shock. Our results suggest that the mere possibility of an exogenous shock strengthens the cooperation between individuals, which can ultimately mitigate its negative impact on total profits.