Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 333-353 |
| Journal | Economic Journal |
| Volume | 119 |
| Issue number | 536 |
| Publication status | Published - 2009 |
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On reputation - A microfoundation of contract enforcement and price rigidity. / Fehr, E.; Brown, M.; Zehnder, C.
In: Economic Journal, Vol. 119, No. 536, 2009, p. 333-353.Research output: Contribution to journal › Article › Scientific › peer-review
TY - JOUR
T1 - On reputation - A microfoundation of contract enforcement and price rigidity
AU - Fehr, E.
AU - Brown, M.
AU - Zehnder, C.
PY - 2009
Y1 - 2009
N2 - 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.
AB - 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.
M3 - Article
VL - 119
SP - 333
EP - 353
JO - The Economic Journal
JF - The Economic Journal
SN - 0013-0133
IS - 536
ER -