On Reputation : A Microfoundation of Contract Enforcement and Price Rigidity
Journal
The Economic Journal
ISSN
1468-0297
Type
journal article
Date Issued
2009-03-01
Author(s)
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.
Fulltext available at: [http://ftp.iza.org/dp3655.pdf]
Fulltext available at: [http://ftp.iza.org/dp3655.pdf]
Language
English
Keywords
wage rigidity
price rigidity
relational contracts
reciprocity
reputation
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Blackwell
Publisher place
Oxford
Volume
119
Number
536
Start page
333
End page
353
Pages
21
Subject(s)
Eprints ID
72360