The gift of advice: communication in a bilateral gift exchange game

We augment a standard bilateral gift exchange game so employees can send messages at the same time as choosing an effort level. Employee effort (controlling for wages) is unaffected by allowing messages, but wages dramatically increase. Messages affect wages because employees give managers advice to set higher wages, usually explaining that this will result in higher effort. This advice prompts managers to try higher wages, helping them learn that raising wages increases their payoffs. In a follow-up experiment, we directly provide managers with additional information about the relationship between wages and effort. This too causes wages to increase, but to a lesser extent than allowing messages. Our results highlight the critical role of learning in generating gains from positive gift exchange.