Template-type: ReDIF-Paper 1.0
Author-Name: Ernst Fehr
Author-Name-First: Ernst
Author-Name-Last: Fehr
Author-Name: Martin Brown
Author-Name-First: Martin
Author-Name-Last: Brown
Author-Person: pbr129
Author-Name: Christian Zehnder
Author-Name-First: Christian
Author-Name-Last: Zehnder
Author-Person: pze32
Title: On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity
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.
Length: 37 pages
Creation-Date: 2008
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2008/working_paper_2008_17
File-Format: text/html
Number: 2008-17
Classification-JEL: D82, J3, J41, E24, C9
Keywords: Reputation, Reciprocity, Relational Contracts, Price Rigidity, Wage Rigidity
Handle: RePEc:snb:snbwpa:2008-17