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Competition and the Ratchet Effect

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  • Gary Charness
  • Peter Kuhn
  • Marie Claire Villeval

Abstract

In labor markets, the ratchet effect refers to a situation where workers subject to performance pay choose to restrict their output, because they rationally anticipate that firms will respond to higher output levels by raising output requirements or by cutting pay. We model this effect as a multiperiod principal-agent problem with hidden information and study its robustness to labor market competition both theoretically and experimentally. Consistent with our theoretical model, we observe substantial ratchet effects in the absence of competition, which are nearly eliminated when competition is introduced; this is true regardless of whether market conditions favor firms or workers.

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File URL: http://www.jstor.org/stable/full/10.1086/659347
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 29 (2011)
Issue (Month): 3 ()
Pages: 513 - 547

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Handle: RePEc:ucp:jlabec:doi:10.1086/659347

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References

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  1. Kanemoto, Yoshitsugu & MacLeod, W Bentley, 1992. "The Ratchet Effect and the Market for Secondhand Workers," Journal of Labor Economics, University of Chicago Press, vol. 10(1), pages 85-98, January.
  2. S. Bucovetsky, 2003. "Efficient Migration and Income Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 249-278, 04.
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  4. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006. "Competition, hidden information, and efficiency : an experiment," Economics Working Papers we071909, Universidad Carlos III, Departamento de Economía.
  5. Ananish Chaudhuri, 1997. "The Ratchet Principle in a Principal Agent Game with Unknown Costs: An Experimental Analysis," Departmental Working Papers 199608, Rutgers University, Department of Economics.
  6. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc.
  7. Gérard Roland & Khalid Sekkat, 2000. "Managerial career concerns, privatization and restructuring in transition economies," ULB Institutional Repository 2013/7340, ULB -- Universite Libre de Bruxelles.
  8. Dearden, James & Ickes, Barry W & Samuelson, Larry, 1990. "To Innovate or Not to Innovate: Incentives and Innovation in Hierarchies," American Economic Review, American Economic Association, vol. 80(5), pages 1105-24, December.
  9. Choi, Jay Pil & Thum, Marcel, 2001. "The dynamics of corruption with the Ratchet effect," Dresden Discussion Paper Series in Economics 04/01, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
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  11. Dillen, M. & Lundholm, M., 1992. "Dynamic Income Taxation, Redistribution, and the Ratchet Effect," Papers 1992-3, Uppsala - Working Paper Series.
  12. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  13. Dalen, Dag Morten, 1995. "Efficiency-improving investment and the ratchet effect," European Economic Review, Elsevier, vol. 39(8), pages 1511-1522, October.
  14. Puller, Steven L., 2006. "The strategic use of innovation to influence regulatory standards," Journal of Environmental Economics and Management, Elsevier, vol. 52(3), pages 690-706, November.
  15. Allen, Douglas W. & Lueck, Dean, 1999. "Searching For Ratchet Effects In Agricultural Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
  16. Peter Kuhn & Fernando Lozano, 2008. "The Expanding Workweek? Understanding Trends in Long Work Hours among U.S. Men, 1979-2006," Journal of Labor Economics, University of Chicago Press, vol. 26(2), pages 311-343, 04.
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Cited by:
  1. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2011. "Hidden Information, Bargaining Power, And Efficiency: An Experiment," Post-Print halshs-00614472, HAL.
  2. Josse Delfgaauw & Robert Dur & Arjan Non & Willem Verbeke, 2010. "Dynamic Incentive Effects of Relative Performance Pay: A Field Experiment," Tinbergen Institute Discussion Papers 10-124/1, Tinbergen Institute, revised 15 Apr 2011.

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