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Tadelis (2001) - The Market For Reputations As An Incentive Mechanism (view source)
Revision as of 20:25, 28 April 2010
, 20:25, 28 April 2010no edit summary
*This page is referenced in [[BPP Field Exam Papers]]
==Reference(s)==
Tadelis, S. (2001) "The Market for Reputations as an Incentive Mechanism," Journal of Political Economy 110(4):854-882 [http://www.edegan.com/pdfs/Tadelis%20(2001)%20-%20The%20Market%20for%20Reputations%20as%20an%20Incentive%20Mechanism.pdf pdf]
==Abstract==
Reputational career concerns provide incentives for short-lived agents to work hard, but it is well known that these incentives disappear as an agent reaches retirement. This paper investigates the effects of a market for firm reputations on the life cycle incentives of firm owners to exert effort. A dynamic general equilibrium model with moral hazard and adverse selection generates two main results. First, incentives of young and old agents are quantitatively equal, implying that incentives are "ageless" with a market for reputations. Second, good reputations cannot act as effective sorting devices: in equilibrium, more able agents cannot outbid lesser ones in the market for good reputations. In addition, welfare analysis shows that social surplus can fall if clients observe trade in firm reputations.
==Summary==
The model seperates identities from entities (which have names), with the later having reputations. There is a market for names and two types of agent: good and opportunistic. The agents are short-lived but the transferability of the names creates a long-lived entity seperate from the identity of the agents. There is no seperating equilibria where only good or bad types buy names, but there are reputation dynamics - reputations increase after good performance and decrease after bad performance.
==The Model==
The model has the full base assumptions:
*Buyers and sellers are risk neutral
*Types of sellers are indistinguishable and are active for two periods with overlapping generations
*Sellers can choose a new name, keep their name or buy a name
*Only names have track records
*There is a competitive market of buyers so that prices are bid up to their expected surplus
In addition there are the following driving assumptions:
*There are no contingent contracts
*Shifts of name ownership are not observable
*Name changes are costless
*With probability <math>\epsilon \ge 0\,</math> a seller can not change his name (note that this is a technical assumption)
The model uses a rational expectations equilibrium.
There are two types of seller: <math>G\,</math> (good) exist in proportion <math>\gamma\,</math> and succeed with probability <math>P_G \in (0,1)\,</math>, and <math>O\,</math> (opportunistic) exist in proportion <math>1-\gamma\,</math> and success with probability <math>eP_G\,</math> where <math>e \in [0,1]\,</math> and have a cost of effort <math>c(e)\,</math> that satisfies Inada conditions.
The sequence of events is:
#New agents chooses or buys his name
#Buyer pays upfront
#Opportunistic type chooses effort
#Success or failure realized
#Retiring agent can sell his name/continuing agent can change their name
===Benchmark: No Reputations Markets===
<math>
\,</math>
