On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity

Ernst Fehr (), Martin Brown () and Christian Zehnder ()

No 3655, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.

Keywords: wage rigidity; price rigidity; relational contracts; reciprocity; reputation (search for similar items in EconPapers)
JEL-codes: D82 J3 J41 E24 C9 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-cta, nep-exp, nep-mac and nep-mic
Date: 2008-08
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Related works:
Working Paper: On reputation: A microfoundation of contract enforcement and price rigidity (2008)
Working Paper: On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity (2008)
Journal Article: On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity (2009)
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