954 X.Wang/Journal of Economic Psychology(012)91-962 enue function (Falk et al 2006) Employed worker Total revenue Marginal revenue ers,however.may have full knowledge (INFORMED)or no knowledge about the minimum wage policy (UNIN- MED) hm1.with the excepon that your oferd alary has to beo less than 170 points,i.e..170s wage offered s 10 "The above mentioned payment regulations apply to all firms and they all know this regulation.But workers are uninformed about it.' The instructions to workers for the second part of the experiment state that"The second experiment is the same with th first experiment"Therefore.the workers are unaware of the introduction of the minimum wage,which mocks some rea control whe ther the workers have knowledge about the minimum wage policy. We use more re 2.3.Hypotheses analyses with the reservation wages and offers are important for the understanding of the behavioral effects alk et al.(2006) in the ay w Since both and 2 d wor exp rimentalgame Social and the p und in the ultimatun of the he respond of 1000 bet lairness concerns. ve the impac of di ctors on the f nimum e ences or strategic con sion of one conditio m differe can b workers, however, may have full knowledge (INFORMED) or no knowledge about the minimum wage policy (UNIN￾FORMED).2 The firms also know whether workers have the knowledge about the policy or not. In the UNINFORMED conditions, the instructions to firms for the second part of the experiment include the following passages: ‘‘The second experiment is almost the same with experiment 1, with the exception that your offered salary has to be no less than 170 points, i.e., 170 6 wage offered 6 1000.’’ ‘‘The above mentioned payment regulations apply to all firms and they all know this regulation. But workers are uninformed about it.’’ The instructions to workers for the second part of the experiment state that ‘‘The second experiment is the same with the first experiment’’. Therefore, the workers are unaware of the introduction of the minimum wage, which mocks some real labor market conditions when workers are not informed about the policy change. We consider this an important advantage of using the experimental method to test the effect of asymmetric information since in the real market it is not possible to control whether the workers have knowledge about the minimum wage policy.3 The inclusion of NO condition in all sessions of the experiment provides a comparison benchmark with the experiment of Falk et al. and allows us to examine changes of agents’ positions as the minimum wage is introduced. We run two sessions each of the uniformed and informed treatments with a minimum wage of 220 and five sessions each of the uninformed and informed treatments with a minimum wage of 170. We use more resources for the 170 level since the 220 level has been done in Falk et al. (2006). 2.3. Hypotheses We analyze how minimum wage policy affects the workers’ reservation wages, the firms’ wage offers, the contract wages, and the employment level. The contracts and employment are the results of the workers’ and firms’ decisions. Therefore, the analyses with the reservation wages and offers are important for the understanding of the behavioral effects. If we assume pure rationality and money-maximization, the predicted results will be as discussed in Falk et al. (2006). The selfish workers accept any wage offer above or equal to zero. Firms offer a wage of one (or zero) to all three workers in the NO condition. In the minimum wage conditions, firms are required to pay wages equal to or above the minimum wage. Since both 170 and 220 are less than the marginal product of the third worker, firms offer the minimum wage to all three workers. All three workers are employed in the NO condition and MW condition. Considerable evidence has suggested that the self-interest hypotheses do not predict the behavior well in the case of our experimental game. Social preferences, and the perception of fairness, in particular, play important roles. People have het￾erogeneous preferences for fairness and reciprocity. This will affect their reservation wages and wage offers in the absence of the minimum wage. One common allocation preference may follow the pattern found in the ultimatum game: the proposer offers on average 70–80% of the equal split to the responder (Camerer, 2003; Fehr & Gächter, 2000). As Falk et al. computed, if a firm hires three workers, an equal split of the revenue of 1000 between the firm and the three workers would be a wage of 250. An offer of 70–80% of 250 implies a wage of between 175 and 200. According to Falk et al., firms’ offers are close to the profit-maximizing wages assuming firms know the distribution of the reservation wages of workers with a fairness concern. As the minimum wage policy is introduced, the decisions of the firms who try to maximize their profit are likely to be driven by three factors: their own social preference, the legal constraint, and their expectations of worker’s fairness concerns. We analyze the impacts of different factors on the firms’ offering behavior according to their different types. Since people have heterogeneous preferences about fairness, some firms’ offers under NO condition would be lower than the minimum wage level required in the MW condition (we name these firms Type 1 firms) and some would be equal to or higher than the minimum level (Type 2 firms). When the minimum wage is introduced, a few changes are expected. First, the legal constraint will force Type 1 firms to raise their wages at least to the minimum level. Second, the firms’ social preferences and their expected fairness concern of the workers (or strategic concern) will determine whether Type 1 firms will raise the wages equal to or beyond the minimum level. Third, social preferences or strategic con￾Table 1 Firms’ revenue function (Falk et al., 2006). Employed workers Total revenue Marginal revenue 0 0– 1 390 390 2 740 350 3 1000 260 2 Note that each subject is randomly assigned to only one session of one condition. Therefore, it is not possible for one subject to be assigned to both INFORMED and UNINFORMED conditions. Then each subject is randomly assigned as a worker or a firm without changing the roles even though they are randomly matched to form different firm-workers groups for each of the 15 rounds in one session. 3 Some may argue that there can be a learning effect on the part of the workers about the policy from the multiple periods of the game. However, the experiment was done in a short period of time. Even if there is a learning effect in the later periods, it would have worked against our results and have weakened the significance of the test. 954 X. Wang / Journal of Economic Psychology 33 (2012) 951–962