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Competition and the Ratchet Effect

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

No 3784, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: competition; experiment; private information; ratchet effect; 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-cbe, nep-com, nep-cta and nep-exp
Date: 2008-10
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Working Paper: Competition and the Ratchet Effect (2009)
Working Paper: Competition and the Ratchet Effect (2009)
Working Paper: Competition and the Ratchet Effect (2009)
Working Paper: Competition and the Ratchet Effect (2008) Downloads
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