Publication Type

Working Paper

Version

publishedVersion

Publication Date

2-2006

Abstract

Final goods producers, who may be intrinsically honest (a behavioral type) or opportunistic (strategic), play a repeated game of imperfect information with suppliers of an input of variable (and non-verifiable) quality. Returns to cheating are increasing in the proportion of intrinsically honest producers. If producers compete for another scarce input, adverse selection reduces this proportion enough to enforce universal honesty, whether at a high or a low quality equilibrium. This mechanism limits the proportion of behavioral types in the population of producers over a wide range of parameters: despite their inability to compete with opportunists, they are not wholly wiped out due to the strategic response of input suppliers. Moreover, in equilibrium, opportunists must replicate the behavioral type’s behavior. Thus competition curtails the presence of the behavioral type but increases the incidence if its behavior. If a labor market, where skilled and unskilled labor coexist, is also endogenized, an honest equilibrium with both high and low quality will generally be reached; however an exclusively high quality equilibrium with unemployment of unskilled labor is also possible.

Keywords

Moral hazard, evolution, strategic response, repeated games, skill.

Discipline

Behavioral Economics

Research Areas

Applied Microeconomics

First Page

1

Last Page

26

Publisher

SMU Economics and Statistics Working Paper Series, No. 06-2006

City or Country

Singapore

Copyright Owner and License

Authors

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