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Title:On reputation: a microfoundation of contract enforcement and price rigidity PDF Logo
Authors:Fehr, Ernst
Brown, Martin
Zehnder, Christian
Issue Date:2008
Series/Report no.:IZA Discussion Papers 3655
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.
Subjects:Reputation
reciprocity
relational contracts
price rigidity
wage rigidity
JEL:D82
Persistent Identifier of the first edition:urn:nbn:de:101:1-20080828211
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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