Ratchet Effect - Explained
What is the Ratchet Effect?
Written by Jason Gordon
Updated at April 24th, 2022
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What is the Ratchet Effect?
The Ratchet Effect refers to the escalation of production, price, or wage that tends to self-perpetuate and resist fall back. People are influenced by the previous best or highest level, which makes it difficult to reverse the change.
For example, if a person receives a 12% salary hike during the last appraisal and is offered a 7% hike in the current appraisal, he or she might feel disappointed with the present hike. Similarly, if a company implements a new strategy, employs extra workers, offers more incentive, and invest more capital for increasing the production, it is difficult for them to scale back the production to its previous level even if the new strategy proves to be costly for them.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Related Topics
- Self Interest
- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher's Separation Theorem
- Ratchet Effect
