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Competition and the Ratchet Effect

Author

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  • Gary Charness

    (Department of Economics, University of California, Santa Barbara)

  • Peter Kuhn

    (Department of Economics, University of California, Santa Barbara)

  • Marie-Claire Villeval

    (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)

Abstract

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.

Suggested Citation

  • Gary Charness & Peter Kuhn & Marie-Claire Villeval, 2008. "Competition and the Ratchet Effect," Working Papers 0828, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:0828
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    Cited by:

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    2. John S. Heywood & Uwe Jirjahn, 2014. "Variable Pay, Industrial Relations and Foreign Ownership: Evidence from Germany," British Journal of Industrial Relations, London School of Economics, vol. 52(3), pages 521-552, September.
    3. Manuel Munoz-Herrera & Ernesto Reuben, 2019. "Business culture: The role of personal and impersonal business relationships on market efficiency," Working Papers 20190027, New York University Abu Dhabi, Department of Social Science, revised Jun 2019.
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    5. Brice Corgnet & Joaquín Gómez-Miñambres & Roberto Hernán-González, 2015. "Goal Setting and Monetary Incentives: When Large Stakes Are Not Enough," Management Science, INFORMS, vol. 61(12), pages 2926-2944, December.
    6. Grund, Christian & Sliwka, Dirk & Titz, Krystina, 2019. "Works Councils and Performance Appraisals," IZA Discussion Papers 12670, Institute of Labor Economics (IZA).
    7. Delfgaauw, Josse & Dur, Robert & Non, Arjan & Verbeke, Willem, 2014. "Dynamic incentive effects of relative performance pay: A field experiment," Labour Economics, Elsevier, vol. 28(C), pages 1-13.
    8. Thomas Gall & Xiaocheng Hu & Michael Vlassopoulos, 2019. "Dynamic incentive effects of assignment mechanisms: Experimental evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(4), pages 687-712, November.
    9. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Sara Martinez-de-Morentin, 2017. "Performance Measurement and Incentive Intensity," Journal of Labor Research, Springer, vol. 38(4), pages 496-546, December.
    10. Clingingsmith, David & Sheremeta, Roman M, 2017. "Status and Economic Rent: Experimental Evidence on the Matthew Effect," SocArXiv evwpa, Center for Open Science.
    11. Socha, Karolina, 2014. "Mixed reimbursement of hospitals: Securing high activity and global expenditures control?," DaCHE discussion papers 2014:3, University of Southern Denmark, Dache - Danish Centre for Health Economics.
    12. Ottorino Chillemi & Benedetto Gui & Lorenzo Rocco, 2013. "The value of information disclosure under local learning. The case of fixed types," "Marco Fanno" Working Papers 0161, Dipartimento di Scienze Economiche "Marco Fanno".
    13. Cardella, Eric & Depew, Briggs, 2018. "Output restriction and the ratchet effect: Evidence from a real-effort work task," Games and Economic Behavior, Elsevier, vol. 107(C), pages 182-202.
    14. Gallier, Carlo & Sturm, Bodo, 2021. "The ratchet effect in social dilemmas," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 251-268.
    15. Uwe Jirjahn, 2016. "Works Councils and Employer Attitudes toward the Incentive Effects of HRM Practices," Research Papers in Economics 2016-07, University of Trier, Department of Economics.
    16. Gallier, Carlo & Sturm, Bodo, 2020. "The ratchet effect in social dilemmas," ZEW Discussion Papers 20-015, ZEW - Leibniz Centre for European Economic Research.
    17. Antonio Cabrales & Gary Charness & Marie Villeval, 2011. "Hidden information, bargaining power, and efficiency: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 14(2), pages 133-159, May.
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    20. Kuhn, Peter J. & Yu, Lizi, 2021. "Kinks as Goals: Accelerating Commissions and the Performance of Sales Teams," IZA Discussion Papers 14115, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Ratchet effect; competition; experiment; private information; labor markets;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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