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The Market for Reputations as an Incentive Mechanism

Steven Tadelis
University of California, Berkeley - Haas School of Business

September 17, 2001

Abstract:
Reputational career concerns provide incentives for short lived agents, but these incentives disappear as an agent reaches retirement. This paper investigates the effects of a market for firm reputations on the life-cycle incentives of firm owners to exert effort. A dynamic general equilibrium model with moral hazard and adverse selection offers two main results. First, incentives of young and old agents are quantitatively equal, implying that incentives are "ageless" with a market for reputations. Second, good reputations cannot act as effective sorting devices: in equilibrium, more able agents cannot outbid lesser ones in the market for good reputations. Finally, welfare analysis shows that social surplus can fall if clients observe trade in firm reputations.

Keywords: Name, Reputation, Career Concerns

JEL Classifications: C70, D82, L14

Working Paper Series

Date posted: October 01, 2001 ; Last revised: October 15, 2001

Suggested Citation

Tadelis, Steven, The Market for Reputations as an Incentive Mechanism (September 17, 2001). Available at SSRN: http://ssrn.com/abstract=283258 or doi:10.2139/ssrn.283258

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Contact Information

Steven Tadelis (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building
Berkeley, CA 94720
United States