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Competition and the Ratchet Effect

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Author Info

  • Gary Charness

    ()
    (Department of Economics, University of California, Santa Barbara)

  • Peter Kuhn

    ()
    (Department of Economics, University of California, Santa Barbara)

  • Marie-Claire Villeval

    ()
    (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)

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.

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Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0828.

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Length: 36 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:gat:wpaper:0828

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Keywords: Ratchet effect; competition; experiment; private information; labor markets;

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References

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  1. 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.
  2. Jay Pil Choi & Marcel Thum, 2000. "The Dynamics of Corruption with the Ratchet Effect," CESifo Working Paper Series 334, CESifo Group Munich.
  3. 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.
  4. 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.
  5. Dearden, J. & Ickes, B.W. & Samuelson, L., 1988. "To Innovate Or Not To Innovate: Incentives And Innovation In Hierarchies," Papers 0-88-1, Pennsylvania State - Department of Economics.
  6. Macleod, W.B. & Kenemoto, Y., 1990. "The Ratchet Effect And The Market For Second-Hand Workers," Cahiers de recherche 9027, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. Dillen, M. & Lundholm, M., 1992. "Dynamic Income Taxation, Redistribution, and the Ratchet Effect," Papers 1992-3, Uppsala - Working Paper Series.
  8. Lemieux, Thomas & MacLeod, W. Bentley & Parent, Daniel, 2007. "Performance Pay and Wage Inequality," IZA Discussion Papers 2850, Institute for the Study of Labor (IZA).
  9. Roland, Gerard & Sekkat, Khalid, 2000. "Managerial career concerns, privatization and restructuring in transition economies," European Economic Review, Elsevier, vol. 44(10), pages 1857-1872, December.
  10. Chaudhuri, Ananish, 1998. "The ratchet principle in a principal agent game with unknown costs: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 291-304, November.
  11. Dalen, Dag Morten, 1995. "Efficiency-improving investment and the ratchet effect," European Economic Review, Elsevier, vol. 39(8), pages 1511-1522, October.
  12. Barry W. Ickes & Larry Samuelson, 1987. "Job Transfers and Incentives in Complex Organizations: Thwarting the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 275-286, Summer.
  13. 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.
  14. 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.
  15. 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.
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Cited by:
  1. Delfgaauw, Josse & Dur, Robert & Non, Arjan & Verbeke, Willem, 2013. "Dynamic Incentive Effects of Relative Performance Pay: A Field Experiment," IZA Discussion Papers 7652, Institute for the Study of Labor (IZA).
  2. Antonio Cabrales & Gary Charness & Marie Villeval, 2011. "Hidden information, bargaining power, and efficiency: an experiment," Experimental Economics, Springer, vol. 14(2), pages 133-159, May.
  3. John S. Heywood & Uwe Jirjahn, 2011. "Variable Pay, Industrial Relations and Foreign Ownership: Evidence from Germany," Research Papers in Economics 2011-05, University of Trier, Department of Economics.
  4. Ottorino Chillemi & Benedetto Gui & Lorenzo Rocco, 2013. "The value of information disclosure under local learning. The case of fixed types," "Marco Fanno" Working Papers 0161, Dipartimento di Scienze Economiche "Marco Fanno".

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