IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/12699.html
   My bibliography  Save this paper

Dynamic Contracting with Limited Commitment and the Ratchet Effect

Author

Listed:
  • Gerardi, Dino

Abstract

We study dynamic contracting with adverse selection and limited commitment. A firm (the principal) and a worker (the agent) interact for potentially infinitely many periods. The worker is privately informed about his productivity and the firm can only commit to short-term contracts. The ratchet effect is in place since the firm has the incentive to change the terms of trade and offer more demanding contracts when it learns that the worker is highly productive. As the parties become arbitrarily patient, the equilibrium outcome takes one of two forms. If the prior probability of the worker being productive is low, the firm offers a pooling contract and no information is ever revealed. In contrast, if this prior probability is high, the firm fires the unproductive worker at the very beginning of the relationship.

Suggested Citation

  • Gerardi, Dino, 2018. "Dynamic Contracting with Limited Commitment and the Ratchet Effect," CEPR Discussion Papers 12699, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12699
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12699
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kanemoto, Yoshitsugu & MacLeod, W Bentley, 1992. "The Ratchet Effect and the Market for Secondhand Workers," Journal of Labor Economics, University of Chicago Press, vol. 10(1), pages 85-98, January.
    2. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    3. Florian Scheuer & Alexander Wolitzky, 2016. "Capital Taxation under Political Constraints," American Economic Review, American Economic Association, vol. 106(8), pages 2304-2328, August.
    4. Maestri, Lucas, 2017. "Dynamic contracting under adverse selection and renegotiation," Journal of Economic Theory, Elsevier, vol. 171(C), pages 136-173.
    5. Jean-Jacques Laffont & Jean Tirole, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 597-625.
    6. Marina Halac, 2012. "Relational Contracts and the Value of Relationships," American Economic Review, American Economic Association, vol. 102(2), pages 750-779, April.
    7. Carmichael, H Lorne & MacLeod, W Bentley, 2000. "Worker Cooperation and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 18(1), pages 1-19, January.
    8. Daron Acemoglu & Mikhail Golosov & Aleh Tsyvinski, 2010. "Dynamic Mirrlees Taxation under Political Economy Constraints," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 841-881.
    9. Gibbons, Robert, 1987. "Piece-Rate Incentive Schemes," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 413-429, October.
    10. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, September.
    11. Bruno Strulovici, 2017. "Contract Negotiation and the Coase Conjecture: A Strategic Foundation for Renegotiation‐Proof Contracts," Econometrica, Econometric Society, vol. 85, pages 585-616, March.
    12. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
    13. Beccuti, Juan & Möller, Marc, 2018. "Dynamic adverse selection with a patient seller," Journal of Economic Theory, Elsevier, vol. 173(C), pages 95-117.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Juan Beccuti, 2020. "On the Optimality of Price-posting in Rental Markets," Diskussionsschriften dp2007, Universitaet Bern, Departement Volkswirtschaft.
    2. Suehyun Kwon, 2019. "Revelation Principle with Persistent Correlated Types: Impossibility Result," CESifo Working Paper Series 7782, CESifo.
    3. Laura Doval & Vasiliki Skreta, 2019. "Optimal mechanism for the sale of a durable good," Papers 1904.07456, arXiv.org, revised Aug 2020.
    4. Laura Doval & Vasiliki Skreta, 2018. "Mechanism Design with Limited Commitment," Papers 1811.03579, arXiv.org, revised Aug 2020.

    More about this item

    Keywords

    Dynamic Contracting; Limited Commitment; Ratchet Effect;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:12699. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: https://www.cepr.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.