The ratchet effect: A learning perspective

Department of Economics and Decision Sciences
Speaker : V. Bhaskar (UT Austin)
Room S-122 

Abstract : 

We examine the ratchet effect under moral hazard and symmetric learning by worker and firm about new  technology. Shirking increases the worker's future payoffs, since the firm  overestimates job difficulty. High-powered incentives to deter shirking induce the agent to over-work, since he can quit if the firm thinks   the job is too easy. With continuous effort choices, no deterministic interior effort is implementable. We provide conditions under which randomized effort is implementable, so that a profit-maximizing  distribution over efforts exists.

Joint work with Nikita Roketskiy