Wage rigidity in a competitive incomplete contract market

Do employers and workers underbid prevailing wages if there is unemployment ? Do employers take advantage of workers' underbidding by lowering wages? W e hypothesize that under conditions of incomplete labor contracts, wage lev els may positively affect workers' propensity to cooperate. This, in turn, may prevent firms from underbidding or accepting the underbidding of worker s. Experimental double auctions conducted for the purpose of examining thes e hypotheses yield the following results: (i) Workers' underbidding is very frequent, but employers refuse to accept workers' low wage offers in marke ts with incomplete labor contracts. However, in the presence of complete la bor contracts, employers accept and actively enforce wages close to the com petitive level. (ii) Workers' effort is positively related to the wage leve l. Therefore, wage cutting is costly for the employer if workers have discr etion over their effort level. This holds true even in the presence of expl icit performance incentives.