The Market for Reputations as an Incentive Mechanism
AbstractReputational 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 InfoArticle provided by University of Chicago Press in its journal Journal of Political Economy.
Volume (Year): 110 (2002)
Issue (Month): 4 (August)
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Web page: http://www.journals.uchicago.edu/JPE/
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