Advanced Search
MyIDEAS: Login to save this paper or follow this series

On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity

Contents:

Author Info

  • Fehr, Ernst

    ()
    (University of Zurich)

  • Brown, Martin

    ()
    (Swiss National Bank)

  • Zehnder, Christian

    ()
    (University of Lausanne)

Abstract

We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://ftp.iza.org/dp3655.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3655.

as in new window
Length: 33 pages
Date of creation: Aug 2008
Date of revision:
Publication status: published in: Economic Journal, 2009, 119 (536), 333 - 353
Handle: RePEc:iza:izadps:dp3655

Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org

Order Information:
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Email:

Related research

Keywords: price rigidity; relational contracts; reciprocity; wage rigidity; reputation;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Martin Brown & Armin Falk & Ernst Fehr, 2012. "Competition And Relational Contracts: The Role Of Unemployment As A Disciplinary Device," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 10(4), pages 887-907, 08.
  2. John A. List, 2005. "The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions," NBER Working Papers 11616, National Bureau of Economic Research, Inc.
  3. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(1), pages 106-134, February.
  4. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, Elsevier, vol. 27(2), pages 245-252, August.
  5. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 68(3), pages 351-81, July.
  6. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 637-58, September.
  7. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How wages change: micro evidence from the international wage flexibility project," Staff Reports, Federal Reserve Bank of New York 275, Federal Reserve Bank of New York.
  8. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
  9. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 938-45, September.
  10. Camerer, Colin & Weigelt, Keith, 1988. "Experimental Tests of a Sequential Equilibrium Reputation Model," Econometrica, Econometric Society, Econometric Society, vol. 56(1), pages 1-36, January.
  11. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 828-62, August.
  12. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 39-84, February.
  13. Charles Bellemare & Bruce Shearer, 2007. "Gift Exchange within a Firm: Evidence from a Field Experiment," Cahiers de recherche, CIRPEE 0708, CIRPEE.
  14. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 42(4), pages 1009-1055, December.
  15. Peter AUER & Sandrine CAZES, 2000. "The resilience of the long-term employment relationship: Evidence from the industrialized countries," International Labour Review, International Labour Organization, International Labour Organization, vol. 139(4), pages 379-408, December.
  16. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 255-274, April.
  17. R. Lynn Hannan & John H. Kagel & Donald V. Moser, 2002. "Partial Gift Exchange in an Experimental Labor Market: Impact of Subject Population Differences, Productivity Differences, and Effort Requests on Behavior," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 20(4), pages 923-951, October.
  18. Neumark, David & Sharpe, Steven A, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 657-80, May.
  19. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  20. Ernst Fehr & Lorenz Götte, 2000. "Robustness and Real Consequences of Nominal Wage Rigidity," CESifo Working Paper Series 335, CESifo Group Munich.
  21. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 297-326, October.
  22. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 117-25, March.
  23. Stephen Nickell & Glenda Quintini, 2001. "Nominal Wage Rigidity and the Rate of Inflation," CEP Discussion Papers, Centre for Economic Performance, LSE dp0489, Centre for Economic Performance, LSE.
  24. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/5911, ULB -- Universite Libre de Bruxelles.
  25. Charness, Gary & Frechette, Guillaume R & Kagel, John H, 2002. "How Robust is Laboratory Gift Exchange?," University of California at Santa Barbara, Economics Working Paper Series qt8qq4k3ph, Department of Economics, UC Santa Barbara.
  26. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  27. Sebastian Kube & Michel André Maréchal & Clemens Puppe, 2006. "Putting Reciprocity to Work - Positive versus Negative Responses in the Field," University of St. Gallen Department of Economics working paper series 2006, Department of Economics, University of St. Gallen 2006-27, Department of Economics, University of St. Gallen.
  28. Martin Brown & Christian Zehnder, 2006. "Credit Reporting, Relationship Banking, and Loan Repayment," Working Papers 2006-03, Swiss National Bank.
  29. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers, Queen's University, Department of Economics 585, Queen's University, Department of Economics.
  30. Blinder, Alan S & Choi, Don H, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(4), pages 1003-15, November.
  31. Gachter, Simon & Falk, Armin, 2002. " Reputation and Reciprocity: Consequences for the Labour Relation," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 104(1), pages 1-26.
  32. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
  33. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 255-83, May.
  34. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(497), pages 684-708, 07.
  35. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/5927, ULB -- Universite Libre de Bruxelles.
  36. Florian Englmaier & Stephen Leider, 2012. "Contractual and Organizational Structure with Reciprocal Agents," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 4(2), pages 146-83, May.
  37. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
  38. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  39. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
  40. Martin Brown & Armin Falk & Ernst Fehr, 2004. "Relational Contracts and the Nature of Market Interactions," Econometrica, Econometric Society, Econometric Society, vol. 72(3), pages 747-780, 05.
  41. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 615-41, August.
  42. MacLeod, W.B. & Malcomson, J.M., 1997. "Motivation and markets," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 9720, Economics Division, School of Social Sciences, University of Southampton.
  43. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
  44. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Simon Cornée & Ariane Szafarz, 2012. "Vive la Différence: Social Banks and Reciprocity in the Credit Market," Working Papers CEB, ULB -- Universite Libre de Bruxelles 12-029, ULB -- Universite Libre de Bruxelles.
  2. James B. Rebitzer & Lowell J. Taylor, 2010. "Extrinsic Rewards and Intrinsic Motives: Standard and Behavioral Approaches To Agency and Labor Markets," Economics Working Paper Archive, Levy Economics Institute wp_607, Levy Economics Institute.
  3. Reeson, Andrew F. & Tisdell, John G. & McAllister, Ryan R.J., 2011. "Trust, reputation and relationships in grazing rights markets: An experimental economic study," Ecological Economics, Elsevier, Elsevier, vol. 70(4), pages 651-658, February.
  4. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral economics and macroeconomic models," Journal of Macroeconomics, Elsevier, Elsevier, vol. 41(C), pages 133-147.
  5. Brown, Martin & Serra-Garcia, Marta, 2011. "The Threat of Exclusion and Relational Contracting," Discussion Papers in Economics, University of Munich, Department of Economics 12287, University of Munich, Department of Economics.
  6. Lenton, Pamela & Mosley, Paul, 2011. "Incentivising trust," Journal of Economic Psychology, Elsevier, Elsevier, vol. 32(5), pages 890-897.
  7. Brown, M. & Serra Garcia, M., 2010. "Relational Contracting Under the Threat of Expropriation – Experimental Evidence," Discussion Paper, Tilburg University, Center for Economic Research 2010-85, Tilburg University, Center for Economic Research.
  8. Steinar Holden, 2012. "Implications of insights from behavioral economics for macroeconomic models," Working Paper, Norges Bank 2012/12, Norges Bank.
  9. Johnsen, Åshild A & Kvaløy, Ola, 2014. "You always meet twice: An experiment on intrinsic versus instrumental reciprocity," UiS Working Papers in Economics and Finance, University of Stavanger 2014/2, University of Stavanger.
  10. Ebru Isgin & Barry Sopher, 2013. "Information Transparency, Fairness and Labor Market Efficiency," Departmental Working Papers, Rutgers University, Department of Economics 201303, Rutgers University, Department of Economics.
  11. David Zetland & Marina Della Giusta, 2011. "Focal Points, Gender Norms and Reciprocation in Public Good Games," Economics & Management Discussion Papers, Henley Business School, Reading University em-dp2011-01, Henley Business School, Reading University.
  12. Rogers, Douglas B. & Smith, Adam C. & Wilson, Bart J., 2013. "Violence, access, and competition in the market for protection," European Journal of Political Economy, Elsevier, Elsevier, vol. 29(C), pages 1-17.
  13. Vogt, Nora & Reeson, Andrew F. & Bizer, Kilian, 2013. "Communication, competition and social gift exchange in an auction for public good provision," Ecological Economics, Elsevier, Elsevier, vol. 93(C), pages 11-19.
  14. Dunning, David & Fetchenhauer, Detlef & Schlösser, Thomas M., 2012. "Trust as a social and emotional act: Noneconomic considerations in trust behavior," Journal of Economic Psychology, Elsevier, Elsevier, vol. 33(3), pages 686-694.
  15. Li, Lingfang (Ivy) & Xiao, Erte, 2010. "Money Talks? An Experimental Study of Rebate in Reputation System Design," MPRA Paper 22401, University Library of Munich, Germany.
  16. Jed DeVaro & Jin-Hyuk Kim & Nick Vikander, 2014. "Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting," Discussion Papers, University of Copenhagen. Department of Economics 14-13, University of Copenhagen. Department of Economics.
  17. Brown, Martin & Serra-García, Marta, . "The Threat of Exclusion and Relational Contracting," Working Papers on Finance, University of St. Gallen, School of Finance 1407, University of St. Gallen, School of Finance.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp3655. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.