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Competition and the Ratchet EffectGary CharnessUniversity of California, Santa Barbara - Department of Economics Peter KuhnUniversity of California, Santa Barbara - Department of Economics; Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER) Marie-Claire VillevalNational Center for Scientific Research (CNRS) - Institute of Economic Theory and Analysis (GATE); Institute for the Study of Labor (IZA) GATE Working Paper SeriesUniversity of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) October 1, 2008 GATE Working Paper No. 08-28 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.
Number of Pages in PDF File: 36 Keywords: Ratchet effect, competition, experiment, private information, labor markets JEL Classification: C91, D23, D82, J24, L14 working papers seriesDate posted: January 23, 2009 ; Last revised: June 14, 2010Suggested CitationContact Information
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