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Ripoffs, Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study
Author(s) -
DEJONG DOUGLAS V.,
FORSYTHE ROBERT,
LUNDHOLM RUSSELL J.
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb05006.x
Subject(s) - moral hazard , reputation , agency (philosophy) , principal–agent problem , phenomenon , principal (computer security) , business , hazard , service (business) , microeconomics , actuarial science , economics , marketing , political science , incentive , finance , law , sociology , computer security , computer science , epistemology , corporate governance , philosophy , chemistry , organic chemistry , social science
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.