Competition and the Ratchet Effect

Olivier Cardi () and Romain Restout ()
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Olivier Cardi: ERMES, Université Panthéon-Assas Paris 2
Romain Restout: ECONOMIX, University Paris X, and GATE, ENS-LSH Lyon

No 829, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

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.

Keywords: Non Traded Goods; Investment; Employment; Tax Multiplier (search for similar items in EconPapers)
JEL-codes: E22 E62 F32 F41 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2008
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:0829

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