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Competition and the Ratchet Effect

Author

Listed:
  • Gary Charness

    (Department of Economics - UC San Diego - University of California [San Diego] - UC - University of California)

  • Peter Kuhn

    (Department of Economics, University of California - UC Santa Barbara - University of California [Santa Barbara] - UC - University of California)

  • Marie Claire Villeval

    (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure-Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

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, 2011. "Competition and the Ratchet Effect," Post-Print halshs-00333590, HAL.
    • Handle: RePEc:hal:journl:halshs-00333590
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00333590v1
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    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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