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Competition and the Ratchet Effect

  • Gary Charness

    ()

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

  • Peter Kuhn

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

  • Marie Claire Villeval

    ()

    (GATE - Groupe d'analyse et de théorie économique - CNRS - UL2 - Université Lumière - Lyon 2 - Ecole Normale Supérieure Lettres et Sciences Humaines)

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.

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Paper provided by HAL in its series Post-Print with number halshs-00333590.

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Date of creation: 2011
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Publication status: Published in Journal of Labor Economics, University of Chicago Press, 2011, 29 (3), pp. 513-547
Handle: RePEc:hal:journl:halshs-00333590
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00333590
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  1. Cabrales, Antonio & Villeval, Marie Claire & Charness, Gary, 2006. "Competition, hidden information, and efficiency : an experiment," UC3M Working papers. Economics we071909, Universidad Carlos III de Madrid. Departamento de Economía.
  2. Choi, Jay Pil & Thum, Marcel, 2003. "The dynamics of corruption with the ratchet effect," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 427-443, March.
  3. Peter Kuhn & Fernando Lozano, 2008. "The Expanding Workweek? Understanding Trends in Long Work Hours among U.S. Men, 1979-2006," Journal of Labor Economics, University of Chicago Press, vol. 26(2), pages 311-343, 04.
  4. Dalen, Dag Morten, 1995. "Efficiency-improving investment and the ratchet effect," European Economic Review, Elsevier, vol. 39(8), pages 1511-1522, October.
  5. Puller, Steven L., 2006. "The strategic use of innovation to influence regulatory standards," Journal of Environmental Economics and Management, Elsevier, vol. 52(3), pages 690-706, November.
  6. Barry W. Ickes & Larry Samuelson, 1987. "Job Transfers and Incentives in Complex Organizations: Thwarting the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 275-286, Summer.
  7. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, 07.
  8. Macleod, W.B. & Kenemoto, Y., 1990. "The Ratchet Effect and the Market for Second-Hand Workers," Cahiers de recherche 9027, Universite de Montreal, Departement de sciences economiques.
  9. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
  10. 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.
  11. Dearden, James & Ickes, Barry W & Samuelson, Larry, 1990. "To Innovate or Not to Innovate: Incentives and Innovation in Hierarchies," American Economic Review, American Economic Association, vol. 80(5), pages 1105-24, December.
  12. S. Bucovetsky, 2003. "Efficient Migration and Income Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 249-278, 04.
  13. Ananish Chaudhuri, 1997. "The Ratchet Principle in a Principal Agent Game with Unknown Costs: An Experimental Analysis," Departmental Working Papers 199608, Rutgers University, Department of Economics.
  14. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2009. "Performance Pay and Wage Inequality," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 1-49.
  15. Allen, Douglas W. & Lueck, Dean, 1999. "Searching For Ratchet Effects In Agricultural Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
  16. Dillen, Mats & Lundholm, Michael, 1996. "Dynamic income taxation, redistribution, and the ratchet effect," Journal of Public Economics, Elsevier, vol. 59(1), pages 69-93, January.
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