On reputation: a microfoundation of contract enforcement and price rigidity

Arbeitspapier

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

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 3655

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design
• Subject: Reputation ; reciprocity ; relational contracts ; price rigidity ; wage rigidity ; Unvollständiger Vertrag ; Prestige ; Austauschtheorie (Soziologie) ; Marktmechanismus ; Preisrigidität ; Lohnrigidität ; Mikroökonomische Fundierung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fehr, Ernst ; Brown, Martin ; Zehnder, Christian
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/35179
• URN: urn:nbn:de:101:1-20080828211
• Last update: 10.03.2025, 11:44 AM CET