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Competition and the Ratchet Effect

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

No 16325, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In labor markets, the ratchet effect refers to a situation where workers subject to performance pay choose to restrict their output, because they rationally anticipate that firms will respond to higher output levels by raising output requirements or cutting pay. We model this effect as a multi-period principal-agent problem with hidden information, and study its robustness to labor market competition both theoretically and experimentally. Consistent with our theoretical model, we observe substantial ratchet effects in the absence of competition, which is nearly eliminated when competition is introduced; this is true regardless of whether market conditions favor firms or workers.

JEL-codes: C91 D23 D82 J22 J3 J41 L14 (search for similar items in EconPapers)
Date: 2010-09
Note: LS
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Published as Gary Charness & Peter Kuhn & Marie Claire Villeval, 2011. "Competition and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 29(3), pages 513 - 547.

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http://www.nber.org/papers/w16325.pdf (application/pdf)

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