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Competition and the Ratchet Effect

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  • Gary Charness
  • Peter Kuhn
  • Marie-Claire Villeval

Abstract

In labor markets, the ratchet effect refers to a situation where workers subject to performance pay choose to restrict their output, because they rationally anticipate that firms will respond to higher output levels by raising output requirements or cutting pay. We model this effect as a multi-period principal-agent problem with hidden information, and study its robustness to labor market competition both theoretically and experimentally. Consistent with our theoretical model, we observe substantial ratchet effects in the absence of competition, which is nearly eliminated when competition is introduced; this is true regardless of whether market conditions favor firms or workers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16325.

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Date of creation: Sep 2010
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Publication status: published as Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513 - 547.
Handle: RePEc:nbr:nberwo:16325

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  1. Roland, Gérard & Sekkat, M. Khalid, 1996. "Managerial Career Concerns, Privatization and Restructuring in Transition Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1363, C.E.P.R. Discussion Papers.
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  3. 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.
  4. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc.
  5. Ananish Chaudhuri, 1997. "The Ratchet Principle in a Principal Agent Game with Unknown Costs: An Experimental Analysis," Departmental Working Papers, Rutgers University, Department of Economics 199608, Rutgers University, Department of Economics.
  6. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006. "Competition, Hidden Information and Efficiency: An Experiment," Post-Print, HAL halshs-00175051, HAL.
  7. Choi, Jay Pil & Thum, Marcel, 2003. "The dynamics of corruption with the ratchet effect," Journal of Public Economics, Elsevier, Elsevier, vol. 87(3-4), pages 427-443, March.
  8. Dearden, J. & Ickes, B.W. & Samuelson, L., 1988. "To Innovate Or Not To Innovate: Incentives And Innovation In Hierarchies," Papers, Pennsylvania State - Department of Economics 0-88-1, Pennsylvania State - Department of Economics.
  9. Dillen, Mats & Lundholm, Michael, 1996. "Dynamic income taxation, redistribution, and the ratchet effect," Journal of Public Economics, Elsevier, Elsevier, vol. 59(1), pages 69-93, January.
  10. 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.
  11. Dalen, Dag Morten, 1995. "Efficiency-improving investment and the ratchet effect," European Economic Review, Elsevier, Elsevier, vol. 39(8), pages 1511-1522, October.
  12. S. Bucovetsky, 2003. "Efficient Migration and Income Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 249-278, 04.
  13. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  14. 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, University of Chicago Press, vol. 26(2), pages 311-343, 04.
  15. Allen, Douglas W. & Lueck, Dean, 1999. "Searching For Ratchet Effects In Agricultural Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 24(02), December.
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Cited by:
  1. Socha, Karolina, 2014. "Mixed reimbursement of hospitals: Securing high activity and global expenditures control?," COHERE Working Paper 2014:3, COHERE - Centre of Health Economics Research, University of Southern Denmark.
  2. Josse Delfgaauw & Robert Dur & Arjan Non & Willem Verbeke, 2010. "Dynamic Incentive Effects of Relative Performance Pay: A Field Experiment," Tinbergen Institute Discussion Papers 10-124/1, Tinbergen Institute, revised 27 Sep 2011.
  3. Antonio Cabrales & Gary Charness & Marie Villeval, 2011. "Hidden information, bargaining power, and efficiency: an experiment," Experimental Economics, Springer, Springer, vol. 14(2), pages 133-159, May.
  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, Dipartimento di Scienze Economiche "Marco Fanno" 0161, Dipartimento di Scienze Economiche "Marco Fanno".
  5. Jirjahn, Uwe & Heywood, John S., 2013. "Variable Pay, Industrial Relations and Foreign Ownership: Evidence from Germany," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79829, Verein für Socialpolitik / German Economic Association.

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