International Trade Theory and Policy
by Steven M. Suranovic

Trade 125-7

Positive Reciprocity

Reciprocity fairness comes in two versions, positive reciprocity and negative reciprocity fairness. Positive reciprocity occurs when an action that has a positive effect upon someone else is reciprocated with an action that has approximately equal positive effect upon another.  If the reaction is not approximately equal in positive value, or if even worse, the reaction has a negative effect upon the first person, then the reaction will likely be judged unfair.  Positive reciprocity fairness requires that positive actions be reciprocated in kind;  a “quid pro quo” type of response.

A simple example of positive reciprocity is the return of a small favor. If a person does something for another, takes care of their cat for the weekend as an example, it seems reasonable and is socially acceptable for the second person to return the favor, perhaps by returning with a small gift.  The reciprocal gift would seem inappropriate, however, if it were very expensive. People expect small favors to be reciprocated, if at all, by actions that are approximately equal in value.

This same type of reciprocation is active in the labor market in the setting of wages and compensation for workers.    Positive reciprocity fairness implies that workers be compensated with wages that are approximately equal in value to the effort they put forth. Although it is difficult to compare the value of a worker’s effort with the value of his or her wage, people nevertheless expect that these two will be vaguely comparable. When they are not, charges of unfairness often arise.

As an example, consider many people’s impression about the wages paid to factory workers in comparison with the wages paid to the CEO and other executives. In some large companies, the CEO may receive compensation in the millions of dollars, sometimes even when the company is losing money and laying-off workers.  Many consider this unjust or unfair.   One possible reason, besides a concern about income distribution, is the impression that the CEO is receiving compensation in excess of what he or she is worth.  And, if the CEO makes more than he is worth, it may follow that other employees, namely the factory workers, are making less than they are worth. In other words, fair reciprocal benefits are not being returned to the employees.

A similar concern may be apparent when people make international wage comparisons. NIKE, the international shoe company, has received a lot of bad press recently because, 1) its workers in production plants in Indonesia and elsewhere typically earn about $2 per day, and 2) endorsement contracts to individuals like Tiger Woods are valued in the multi-millions. Although economists can offer arguments to explain that such differences are valid, most observers of this situation are quick to conclude that NIKE is being unfair.  Again, one reason may be a sense that the principle of positive reciprocity is being violated; Tiger Woods receiving much more than he is worth and the factory workers in the assembly plants earning much less than they are worth.

Positive reciprocity also arises as a principle of negotiation as when countries negotiate free trade areas or when countries negotiate within WTO rounds. In both cases negotiators offer concessions in the form of tariff reductions, or changes in domestic policies that will confer benefits upon the other country. However, each concession is made only if the other country(ies) reciprocate with trade liberalization measures of their own that will return the benefit.  Indeed one of the major stumbling blocks in trade liberalization negotiations involves a perception that one country is conceding more than the others are returning. Negotiations can falter if the perceived equality of the quid pro quo is not maintained.

International Trade Theory and Policy - Chapter 125-7: Last Updated on 8/2/01