Competition and the Ratchet Effect

Gary Charness (), Peter Kuhn () and Marie-Claire Villeval ()

No 828, Working Papers from Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure

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: Ratchet effect; competition; experiment; private information; labor markets (search for similar items in EconPapers)
JEL-codes: C91 D23 D82 J24 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-exp, nep-lab and nep-mic
Date: 2008

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ftp://ftp.gate.cnrs.fr/RePEc/2008/0828.pdf (application/pdf)

Related works:
Working Paper: Competition and the Ratchet Effect (2008)
Working Paper: Competition and the Ratchet Effect (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:gat:wpaper:0828

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