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On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity

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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.

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Bibliographic Info

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

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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

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

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Cited by:
  1. Pamela Lenton & Paul Mosley, 2009. "Incentivising trust," Working Papers 2009004, The University of Sheffield, Department of Economics, revised Mar 2009.
  2. Simon Cornée & Ariane Szafarz, 2012. "Vive la Différence: Social Banks and Reciprocity in the Credit Market," Working Papers CEB 12-029, ULB -- Universite Libre de Bruxelles.
  3. 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 wp_607, Levy Economics Institute.
  4. Johnsen, Åshild A & Kvaløy, Ola, 2014. "You always meet twice: An experiment on intrinsic versus instrumental reciprocity," UiS Working Papers in Economics and Finance 2014/2, University of Stavanger.
  5. Vogt, Nora & Reeson, Andrew F. & Bizer, Kilian, 2013. "Communication, competition and social gift exchange in an auction for public good provision," Ecological Economics, Elsevier, vol. 93(C), pages 11-19.
  6. Brown, Martin & Serra-Garcia, Marta, 2011. "The Threat of Exclusion and Relational Contracting," Discussion Papers in Economics 12287, University of Munich, Department of Economics.
  7. Holden, Steinar, 2012. "Implications of Insights from Behavioral Economics for Macroeconomic Models," Memorandum 25/2012, Oslo University, Department of Economics.
  8. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral Economics and Macroeconomic Models," Finance and Economics Discussion Series 2014-43, Board of Governors of the Federal Reserve System (U.S.).
  9. Brown, Martin & Serra-García, Marta, . "The Threat of Exclusion and Relational Contracting," Working Papers on Finance 1407, University of St. Gallen, School of Finance.
  10. 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, vol. 70(4), pages 651-658, February.
  11. 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, vol. 29(C), pages 1-17.
  12. Ebru Isgin & Barry Sopher, 2013. "Information Transparency, Fairness and Labor Market Efficiency," Departmental Working Papers 201303, Rutgers University, Department of Economics.
  13. 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.
  14. Brown, M. & Serra Garcia, M., 2010. "Relational Contracting Under the Threat of Expropriation – Experimental Evidence," Discussion Paper 2010-85, Tilburg University, Center for Economic Research.
  15. Jed DeVaro & Jin-Hyuk Kim & Nick Vikander, 2014. "Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting," Discussion Papers 14-13, University of Copenhagen. Department of Economics.
  16. 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, vol. 33(3), pages 686-694.
  17. David Zetland & Marina Della Giusta, 2011. "Focal Points, Gender Norms and Reciprocation in Public Good Games," Economics & Management Discussion Papers em-dp2011-01, Henley Business School, Reading University.

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