Charness, Gary () (University of California, Santa Barbara) Kuhn, Peter J. () (University of California, Santa Barbara) Villeval, Marie-Claire () (CNRS, GATE)
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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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number
3784.
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.
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