Competition and the Ratchet Effect

We would like to acknowledge Bentley MacLeod for useful discussions that helped to inspire this paper, and David Cooper, Werner Güth, Bernard Salanié, and seminar participants at the European meeting of the Economic Science Association in Lyon, at the 3rd European Workshop on Experimental and Behavioral Economics in Innsbrück, at the conference of the European Association of Labour Economists in Tallin, at the Beijing Normal University, at ICES at George Mason University in Washington D.C., and at the Universities of Toulouse, Rennes, Nancy, and Xiamen for helpful comments. We would also like to thank Julie Rosaz for valuable research assistance. Kuhn thanks UC Berkeley's Center for Labor Economics for their generous hospitality while conducting research on this project. Villeval gratefully acknowledges financial support from the EMIR program at the French National Agency for Research (ANR BLAN07-3_185547) The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.