Header

UZH-Logo

Maintenance Infos

On reputation: a microfoundation of contract enforcement and price rigidity


Fehr, Ernst; Brown, Martin; Zehnder, Christian (2009). On reputation: a microfoundation of contract enforcement and price rigidity. Economic Journal, 119(536):333-353.

Abstract

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.

Abstract

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.

Statistics

Citations

23 citations in Web of Science®
22 citations in Scopus®
Google Scholar™

Altmetrics

Downloads

0 downloads since deposited on 17 Mar 2009
45 downloads since 12 months

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:March 2009
Deposited On:17 Mar 2009 07:59
Last Modified:05 Apr 2016 13:07
Publisher:Wiley-Blackwell
ISSN:0013-0133
Additional Information:The definitive version is available at www.blackwell-synergy.com
Publisher DOI:https://doi.org/10.1111/j.1468-0297.2008.02240.x

Download

Preview Icon on Download
Preview
Content: Accepted Version
Filetype: PDF
Size: 1MB
View at publisher