DOES FAIRNESS PREVENT MARKET CLEARING - AN EXPERIMENTAL INVESTIGATION

This paper reports the results of an experiment that was designed to t est the impact of fairness on market prices. Prices were determined in a one-sided oral auction, with buyers as price-makers. Upon acceptanc e of an offer, sellers determined the quality of the good. Buyers offe red prices that were substantially above the market-clearing level and expected sellers to respond with high quality levels. This expectatio n was, on average, confirmed by the behavior of sellers. These results provide, therefore, experimental support for the fair wage-effort the ory of involuntary unemployment.