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Competition and the Ratchet Effect

Author

Listed:
  • Charness, Gary

    (University of California, Santa Barbara)

  • Kuhn, Peter J.

    (University of California, Santa Barbara)

  • Villeval, Marie Claire

    (CNRS, GATE)

Abstract

The 'ratchet effect' refers to a situation where a principal uses private information that is revealed by an agent's early actions to the agent's later disadvantage, in a context where binding multi-period contracts are not enforceable. In a simple, context-rich environment, we experimentally study the robustness of the ratchet effect to the introduction of ex post competition for principals or agents. While we do observe substantial and significant ratchet effects in the baseline (no competition) case of our model, we find that ratchet behavior is nearly eliminated by labor-market competition; interestingly this is true regardless of whether market conditions favor principals or agents.

Suggested Citation

  • Charness, Gary & Kuhn, Peter J. & Villeval, Marie Claire, 2008. "Competition and the Ratchet Effect," IZA Discussion Papers 3784, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3784
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    References listed on IDEAS

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    More about this item

    Keywords

    competition; experiment; private information; ratchet effect; labor markets;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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