Skip to main content
Article thumbnail
Location of Repository

Essays on moral hazard, reputation and market structure

By Aron Toth


This thesis is comprised of three pieces of research on moral hazard, reputation and market structure.\ud In particular, following an opening discussion of previous literature, I explore the dynamic interaction\ud between moral hazard and market structure in two distinct game theoretic settings and empirically test\ud a fundamental assumption of these models concerning consumer rationality.\ud In the first Chapter, I survey the studies which shed light on some dimension of the relationship\ud between asymmetric information and market structure and identify the gap in the literature that my\ud research aims to fill. The mechanism of reputation has been primarily investigated in the setting of perfect\ud competition; however, this setting is ill suited for uncovering the rich set of relations between asymmetric\ud information and market structure. Only a handful of articles departed from the perfect competition\ud framework and only few of those introduced strategic interaction among firms, a fundamental ingredient\ud of my research interest. The models which do include strategic interaction have, however, ignored some\ud important dynamics in the interaction of asymmetric information and market structure.\ud Therefore in Chapter II, I develop a model in which market structure affects moral hazard while,\ud in turn, moral hazard fuels market structure dynamics. The model is very general allowing for all\ud kinds of strategic interaction among firms usually considered in the literature. I identify and analyse an\ud important driving force -a survival contest - which has so far been overlooked. The main conclusion\ud is that market concentration in and of itself reduces moral hazard and moral hazard drives the market\ud towards concentration through the survival contest. The model is suitable to explain the puzzling market\ud transformation of important industries such as banking, audit and health care.\ud In Chapter III, I extend the model of Chapter 11 by introducing stochastic entry. First, I demonstrate\ud that my results in the previous Chapter are robust to the entry process. Second, stochastic entry allows me\ud to derive a non-degenerate steady state distribution which exhibits a very intuitive dynamics. Finally,\ud although the complex nature of the dynamics prevents a detailed comparative static analysis of this\ud distribution, it displays two well known empirical regularities. In particular, my model shows that the\ud presence of moral hazard in and of itself produces shake-outs in the market from time to time and also\ud correlated exit and entry rates. The reputation mechanisms in general and in the models of Chapter II and III in particular crucially depend on consumers' ability and willingness to develop an understanding of imperfect information on quality. In order to make reputation an effective disciplinary force, consumers must be strongly rational so that they read and understand imperfect quality indicators. In Chapter IV, this basic assumption on consumer rationality is tested empirically in discrete choice settings in the audit market. I find robust empirical evidence that if consumers are firms rather than individuals, they are strongly rational

Topics: HB, QA
OAI identifier:

Suggested articles


  1. (2006). A Self Instructing Course in Mode Choice Modelling: Multinornial and Nested Logit Models, prepared for U. S. Department of 'Ransportation, Federal 'Ransit Administration, available online on http: //www.
  2. (1998). Alternative nested logit models: structure, properties and estimation. doi
  3. (1998). An Empiric. 11 Examination of Advertising as a Signal of Product Quality, doi
  4. (2005). Applied choice analysis: A primer. Cambridge: doi
  5. (2005). Auditor Size, Market Segmentation and Litigation Patterns: a Theoretical Analysis, Review of Accounting Studies, doi
  6. (2005). Competition and Disclosure Incentives: an Empirical Studies of HN10s,
  7. (2003). Competition and the Incentive to Produce High Quality, doi
  8. (2004). Factors Explaining the Interest Margin in the Banking Sectors of the European Union, doi
  9. (2006). Market Structure - Theory and Evidence, doi
  10. (1984). Reputation and Product Quality, doi
  11. (2008). Seller Reputation", forthcoming in Kip Viscusi (ed): Foundations and Trends in Microeconomics, doi
  12. (1989). Symmetric Equilibrium Existence and Optimality in Differentiated Product Markets, blimeo, Columbia University Economist, The (2003): The next Arthur Andersen?,
  13. (2000). The Impact of Mandatory Disclosure Laws on Product Choices: An Analysis of the Salad Dressing Market, ' doi
  14. (2004). The Role of Market Forces in Assuring Contractual Performance, "
  15. (2004). What do we know about audit quality?, doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.