Ripoffs, Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study

Ripoffs, Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study ABSTRACT This paper examines the effect of the moral hazard problem in an agency relationship where the principal cannot observe the level of service provided by the agent. Using data from laboratory markets, we demonstrate that the presence of moral hazard leads to shirking by agents. However, this “lemons” phenomenon occurs only about one‐half of the time. While there is evidence of reputation effects in these markets, seemingly reputable agents are often able to use opportunities for false advertising to their advantage and “ripoff” principals. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Ripoffs, Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study

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Publisher
Wiley
Copyright
1985 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1985.tb05006.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper examines the effect of the moral hazard problem in an agency relationship where the principal cannot observe the level of service provided by the agent. Using data from laboratory markets, we demonstrate that the presence of moral hazard leads to shirking by agents. However, this “lemons” phenomenon occurs only about one‐half of the time. While there is evidence of reputation effects in these markets, seemingly reputable agents are often able to use opportunities for false advertising to their advantage and “ripoff” principals.

Journal

The Journal of FinanceWiley

Published: Jul 1, 1985

References

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