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On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity

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  • Ernst Fehr
  • Martin Brown
  • Christian Zehnder

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 Swiss National Bank in its series Working Papers with number 2008-17.

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Length: 37 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:snb:snbwpa:2008-17

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Keywords: Reputation; Reciprocity; Relational Contracts; Price Rigidity; Wage Rigidity;

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References

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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Rebitzer, James B. & Taylor, Lowell J., 2011. "Extrinsic Rewards and Intrinsic Motives: Standard and Behavioral Approaches to Agency and Labor Markets," Handbook of Labor Economics, Elsevier, Elsevier.
  4. 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.
  5. 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.
  6. 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.
  7. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral economics and macroeconomic models," Journal of Macroeconomics, Elsevier, Elsevier, vol. 41(C), pages 133-147.
  8. 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.
  9. 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.
  10. 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.
  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, Elsevier, vol. 29(C), pages 1-17.
  12. Steinar Holden, 2012. "Implications of insights from behavioral economics for macroeconomic models," Working Paper, Norges Bank 2012/12, Norges Bank.
  13. 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.
  14. 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.
  15. Lenton, Pamela & Mosley, Paul, 2011. "Incentivising trust," Journal of Economic Psychology, Elsevier, Elsevier, vol. 32(5), pages 890-897.
  16. 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.
  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.

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