Sette, Enrico
(2007)
Reputation and competition in organisations and markets.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis investigates the effects of competition in settings where agents are motivated primarily by reputational concerns. This is typically the case when explicit contracts are difficult to write due to the lack of verifiability of the task performed by the agent, or of output quality. Such situations are widespread in the case of expert advice or professional services. Competition can generate interesting effects when interacting with reputational incentives. The first chapter contains a selective review of the literature on reputational incentives and on the market for expert advice. The second chapter analyses how competition affects the incentives to report truthful information of experts competing to influence a decision maker. The complex interaction between reputational incentives and competition provides important implications for organisational design, and there are situations when delegating decision powers, or adopting forms of favouritism improve upon letting experts communicate their information and compete to influence the decision maker. The third chapter contains an analysis of the effect of competition on the incentives of an important class of experts, financial analysts. A theoretical model is developed to highlight how the behaviour of sell side analysts is affected by the presence of non-sell-side analysts. The predictions of the model are then tested on a dataset of financial analysts recommendations. The main result is that stronger competition decreases the degree of optimism of sell side analysts. Finally, the fourth chapter investigates the effect of entry in a market for experts where customers have different valuation for the service and there is positive sorting, so that higher valuation clients prefer to be served by more reputable experts. The main result is that entry decreases effort incentives for more reputable agents, unless the type of customers also affects the likelihood of successful provision of the service.
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