On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity

21 Pages Posted: 27 Apr 2009

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Christian Zehnder

University of Lausanne

Multiple version iconThere are 3 versions of this paper

Date Written: 0000

Abstract

We study the impact of reputational incentives in markets characterised 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 characterised by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.

Suggested Citation

Fehr, Ernst and Zehnder, Christian, On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity (0000). The Economic Journal, Vol. 119, Issue 536, pp. 333-353, March 2009. Available at SSRN: https://ssrn.com/abstract=1376005 or http://dx.doi.org/10.1111/j.1468-0297.2008.02240.x

Ernst Fehr (Contact Author)

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Christian Zehnder

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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