Difference between revisions of "Tadelis (2001) - The Market For Reputations As An Incentive Mechanism"
imported>Ed (New page: ==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-%20T...) |
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| + | *This page is referenced in [[BPP Field Exam Papers]] | ||
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==Reference(s)== | ==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] | 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] | ||
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==Abstract== | ==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. | 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> | ||
Revision as of 20:25, 28 April 2010
- 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 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]
