On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity

Ernst Fehr, Martin Brown and Christian Zehnder

Economic Journal, 2009, vol. 119, issue 536, 333-353

Abstract: We study the impact of reputational incentives in markets characterised 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 characterised by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Date: 2009
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Journal Article: On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity (2009)
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)
Working Paper: On reputation: A microfoundation of contract enforcement and price rigidity (2008)
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