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George Akerlof's Norm-Gift Exchange Theory

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THE THEORY OF GIFT EXCHANGE : THEORY DERIVATIVES AND POLICY IMPLICATIONS Though a major Sociological theory used in explaining the behaviour of the workers, George A. Akerlof’s main motive to incorporate the Norm-Gift Exchange Theory in economics lies in his confidence in the theory as it relates empirically and emotionally to everyone’s life. Due to this confidence,he extrapolates this traditional theory primarily based on ‘Cash Posters’ to find explanations for wage bargains and conditions. This can be found in the 1982’s popular paper by him called ‘Labour Contracts as Partial Gift Exchange’. Before dwelling into Akerlof’s theory,it is imperative to brush through the Norm-Gift Exchange Theory,initially written by George Homans. …show more content…

Akerlof’s main motive to incorporate the Norm-Gift Exchange Theory in economics lies in his confidence in the theory as it relates empirically and emotionally to everyone’s life. Due to this confidence,he extrapolates this traditional theory primarily based on ‘Cash Posters’ to find explanations for wage bargains and conditions. This can be found in the 1982’s popular paper by him called ‘Labour Contracts as Partial Gift Exchange’. Before dwelling into Akerlof’s theory,it is imperative to brush through the Norm-Gift Exchange Theory,initially written by George Homans and also go behind the main reason why Akerlof integrated the theory in economics. According to the model, the interaction between the workers and the firm is built upon sentiments that each develops over time.As a result of this,the workers acquire utility for an exchange of ‘gifts’ with the firm. The amount of utility in this case refers to the ‘norms’ of exchanging gifts.From the workers,the gift is the additional time spent working for the firm than the required minimum while for the firm,it is the additional wages paid to the workers than what they would get if they were to leave the job of Cash Posting. This means no individual sentiments can be treated equally as social cohesion between workers are close,therefore the firm has to treat the group with same norms …show more content…

The fundamental difference between the two is unlike capital that has free use or can be abused,labor has restrictions attached to it of legal nature and also related to the labor’s willingness to corporate. Akerlof’s theory of partial gift exchange is built up on two major assumptions: first, there are primary labor markets in which unemployed workers are unable to obtain jobs at the prevailing market wages.Second, as the dual theory of labor markets brings up the question of which is a primary market and which is a secondary market, it is assumed that these markets are determined endogenously in this case. A primary market is the one where wages are not market clearing as gift component of labor inputs and wages are sizeable while secondary markets are those where wages are market

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