Working Paper: CEPR ID: DP9571
Authors: Elisabetta Iossa; Patrick Rey
Abstract: We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent?s productivity is a stochastic function of his past productivity and investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long-term contracts may strengthen reputational effects whereas short-term contracting may be optimal when investment has persistent, long-term effects.
Keywords: career concerns; career duration; contract renewal; dynamic incentives; reputation
JEL Codes: D21; D23; D86; L24; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contract expiration approaches (G13) | performance improves (D29) |
| contract duration influences performance dynamics (C41) | performance improves as contract expiration approaches (J41) |
| information decay impacts performance incentives (J33) | decline in performance after contract renewal (Z22) |
| short-term contracts could be optimal (D86) | investments have persistent long-term effects (G31) |
| long-term contracts strengthen reputational effects (L14) | short-term contracts could be optimal (D86) |