The Market for Reputations as an Incentive Mechanism
31 Pages Posted: 1 Oct 2001
Date Written: September 17, 2001
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 Classification: C70, D82, L14
Suggested Citation: Suggested Citation