Paolo Falco, OECD (Organization for Economic Co-operation and development)

“Do employers trust workers too little? An experimental study of trust in the labour market”

We conduct a field experiment to investigate employers’ trust in workers. A sample of real entrepreneurs and workers from urban Ghana are respectively assigned to the roles of employers and employees in the experiment. Employers have the option to hire (trust) an employee, who can in turn choose whether to exert effort (trustworthiness) in a real-effort task with monetary payoffs. We elicit employers and employees’ expectations about each other’s choices and randomly provide information on previous behaviour. We find that employers significantly underestimate workers’ effort. This reduces hiring and profits. We also find that expectations respond to negative signals, but are inelastic with respect to positive news. Finally, we find that experimental behaviour relates directly to real-life choices: employers who hire less in their businesses have more pessimistic expectations and are less likely to trust in the experiment. Our evidence corroborates the hypothesis that an equilibrium with no experimentation and biased beliefs may be self-sustaining.

Contact person: Henrik Hansen