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The Market for Reputations as an Incentive Mechanism

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  • Steven Tadelis

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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Bibliographic 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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