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The Market for Reputations as an Incentive Mechanism

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Author Info
Steven Tadelis

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Abstract

Reputational career concerns provide incentives for short-lived agents to work hard, but it is well known that these incentives disappear as an agent reaches retirement. This paper investigates the effects of a market for firm reputations on the life cycle incentives of firm owners to exert effort. A dynamic general equilibrium model with moral hazard and adverse selection generates two main results. First, incentives of young and old agents are quantitatively equal, implying that incentives are "ageless" with a market for reputations. Second, good reputations cannot act as effective sorting devices: in equilibrium, more able agents cannot outbid lesser ones in the market for good reputations. In addition, welfare analysis shows that social surplus can fall if clients observe trade in firm reputations.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 110 (2002)
Issue (Month): 4 (August)
Pages: 854-882
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Handle: RePEc:ucp:jpolec:v:110:y:2002:i:4:p:854-882

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  1. Costa, Luis Almeida e & Vasconcelos, Luis, 2008. "Share the Fame or Share the Blame? The Reputational Implications of Partnerships," FEUNL Working Paper Series wp539, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
  2. Heski Bar-Isaac, 2004. "Something to Prove: Reputation in teams and hiring to introduce uncertainty," Working Papers 04-07, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  3. Oliver Gürtler & Matthias Kräkel, 2008. "Optimal Tournament Contracts for Heterogenous Workers," Discussion Papers 234, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  4. Tianxi Wang, 2007. "The Reputation of an Organization and its Dynamics," Economics Discussion Papers 637, University of Essex, Department of Economics. [Downloadable!]
  5. Heski Bar-Isaac & Juanjo Ganuza, 2005. "Teaching to the top and searching for superstars," Working Papers 05-06, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  6. Matthias Kräkel, 2007. "Optimal Risk Taking in an Uneven Tournament Game with Risk Averse Players," Discussion Papers 200, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  7. Luis Cabral & Ali Hortacsu, 2004. "The Dynamics of Seller Reputation: Theory and Evidence from eBay," NBER Working Papers 10363, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Junlin Li & Tianyou Li, 2008. "Reputation, control rights and game equilibrium," Psychometrika, Springer, vol. 3(4), pages 513-530, December. [Downloadable!] (restricted)
  9. Nhat Le, 2003. "Contingent Delegation and Ambiguous Property Rights: The Case of China’s Reform," Governance Working Papers 589, East Asian Bureau of Economic Research. [Downloadable!]
  10. Max Blouin & Jean-Marc Bourgeon, 2008. "Practices," Working Papers hal-00360512_v1, HAL. [Downloadable!]
    Other versions:
  11. Hendrik Hakenes & Martin Peitz, 2004. "Selling Reputation When Going out of Business, June 2004," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  12. Joyee Deb, 2008. "Observability and Sorting in a Market for Names," Working Papers 08-25, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  13. Miller, Nolan & Resnick, Paul & Zeckhauser, Richard, 2002. "Eliciting Honest Feedback in Electronic Markets," Working Paper Series rwp02-039, Harvard University, John F. Kennedy School of Government. [Downloadable!]
  14. Nhat Le, 2004. "Contingent delegation and ambiguous property rights: The case of China's Reform," Annales d'Economie et de Statistique, ADRES, issue 75-76, pages 19, Juillet-D. [Downloadable!]
  15. Hakenes, Hendrik & Peitz, Martin, 2004. "Selling Reputation When Going out of Business," Sonderforschungsbereich 504 Publications 04-52, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  16. Nhat Le, 2003. "Contingent and ambiguous property rights: The Case of China's Reform," International and Development Economics Working Papers idec03-4, International and Development Economics. [Downloadable!]
  17. Hongbin Cai & Ichiro Obara, 2006. "Firm Reputation and Horizontanl Integration," Levine's Bibliography 321307000000000285, UCLA Department of Economics. [Downloadable!]
    Other versions:
  18. Alan D. Morrison & William J. Wilhelm, 2004. "Partnership Firms, Reputation, and Human Capital," American Economic Review, American Economic Association, vol. 94(5), pages 1682-1692, December. [Downloadable!]
  19. Luis Cabral & Ali Hortacsu, 2006. "The Dynamics of Seller Reputation: Evidence from eBay," Working Papers 06-32, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  20. Hendrikse, G.W.J. & Jiang, T., 2007. "An Incomplete Contracting Model of Governance Structure Variety in Franchising," Research Paper ERS-2007-049-ORG Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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