TY  - JOUR
AU  - Charness,Gary
AU  - Kuhn,Peter
AU  - Villeval,Marie-Claire
TI  - Competition and the Ratchet Effect
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16325
PY  - 2010
Y2  - September 2010
UR  - http://www.nber.org/papers/w16325
L1  - http://www.nber.org/papers/w16325.pdf
N1  - Author contact info:
Gary Charness
UC, Santa Barbara
E-Mail: charness@econ.ucsb.edu

Peter J. Kuhn
Department of Economics
University of California, Santa Barbara
2127 North Hall
Santa Barbara, CA  93106
Tel: 805/893-3666
Fax: 805/893-8830
E-Mail: pjkuhn@econ.ucsb.edu

Marie-Claire Villeval
GATE, CNRS, University of Lyon,
93, Chemin de Mouilles,
69130, Ecully,
France
E-Mail: villeval@gate.cnrs.fr
AB  - In labor markets, the ratchet effect refers to a situation where workers subject to performance pay choose to restrict their output, because they rationally anticipate that firms will respond to higher output levels by raising output requirements or cutting pay. We model this effect as a multi-period principal-agent problem with hidden information, and study its robustness to labor market competition both theoretically and experimentally. Consistent with our theoretical model, we observe substantial ratchet effects in the absence of competition, which is nearly eliminated when competition is introduced; this is true regardless of whether market conditions favor firms or workers.
ER  -