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Coordination, Incentives, and the Ratchet Effect

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  • John M. Litwack

Abstract

A concept of coordination costs is incorporated into a nonlinear variant of the model studied by Freixas, Guesnerie, and Tirole (1985) on the dynamic regulation of a firm with adverse selection and no commitment (the ratchet effect). Greater coordination costs give rise to two opposing effects. First, the value to the center of obtaining information increases, since this information can be used to eliminate coordination costs. Second, due to the nature of incentive-compatibility constraints, the costs of inducing revelation also increase. It is shown that the second effect always dominates. Greater coordination requirements increase the relative social costs of inducing separation (revelation) as opposed to pooling over and above any additional value of information to the center. A possible application of this theory to the experience of the Soviet economy is discussed.

Suggested Citation

  • John M. Litwack, 1993. "Coordination, Incentives, and the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 271-285, Summer.
  • Handle: RePEc:rje:randje:v:24:y:1993:i:summer:p:271-285
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    Cited by:

    1. 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.
    2. Neary, Hugh M., 2001. "Dynamic consistency in incentive planning with a material input," Journal of Economic Behavior & Organization, Elsevier, vol. 44(3), pages 315-332, March.
    3. M.Ellman., 2010. "What Did The Study of The Soviet Economy Contribute to Mainstream Economics?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 3.
    4. 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.
    5. Currie, David & Levine, Paul L & Rickman, Neil, 1999. "Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?," CEPR Discussion Papers 2274, C.E.P.R. Discussion Papers.
    6. 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.
    7. Roland, Gerard & Sekkat, Khalid, 2000. "Managerial career concerns, privatization and restructuring in transition economies," European Economic Review, Elsevier, vol. 44(10), pages 1857-1872, December.
    8. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
    9. Kornai, János & Maskin, Eric & Roland, Gérard, 2004. "A puha költségvetési korlát - II
      [The soft budget constraint II]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 777-809.
    10. Alexeev, Michael & Kurlyandskaya, Galina, 2003. "Fiscal federalism and incentives in a Russian region," Journal of Comparative Economics, Elsevier, vol. 31(1), pages 20-33, March.

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