Q. Describe the gift exchange model of reciprocity?
George Akerlof (1982) develops a gift exchange model of reciprocity in that employers offer wages unrelated to variations in output and above market level and workers develop concern for each other's welfare, such that all put in effort above the minimum required though the more able workers aren't rewarded for their additional productivity; again, size here depends not on rationality or efficiency but on social factors. Consequently the limit to firm's size is given where costs rise to the point where market can undertake some transactions more efficiently than the firm.