Competition and the Ratchet Effect

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Competition and the Ratchet Effect

Author Info

Gary Charness () (Department of Economics - University of California, Santa Barbara)
Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
Peter Kuhn (Department of Economics, University of California - University of California, Santa Barbara)

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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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Paper provided by HAL in its series Post-Print with number halshs-00333590_v1.

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Date of creation: 2008
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Handle: RePEc:hal:journl:halshs-00333590_v1

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Paper
- Charness, Gary & Kuhn, Peter J. & Villeval, Marie-Claire, 2008. "Competition and the Ratchet Effect," IZA Discussion Papers 3784, Institute for the Study of Labor (IZA). [Downloadable!]
- Gary Charness & Peter Kuhn & Marie-Claire Villeval, 2008. "Competition and the Ratchet Effect," Working Papers 0828, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-11-04 (All new papers)
NEP-CTA-2008-11-04 (Contract Theory & Applications)
NEP-EXP-2008-11-04 (Experimental Economics)
NEP-MIC-2008-11-04 (Microeconomics)

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Other versions:
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Other versions:
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Other versions:
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