On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity

Ernst Fehr, Martin Brown and Christian Zehnder

No 3655, IZA Discussion Papers from Institute of Labor Economics (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: price rigidity; relational contracts; reciprocity; wage rigidity; reputation (search for similar items in EconPapers)
JEL-codes: C9 D82 E24 J3 J41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2008-08
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-cta, nep-exp, nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - published in: Economic Journal, 2009, 119 (536), 333 - 353

Downloads: (external link)
https://docs.iza.org/dp3655.pdf (application/pdf)

Related works:
Journal Article: On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity (2009)
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp3655

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().