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 contractsmay strengthen reputational effects whereas shortterm contracting may be optimal when investment has persistent, long-term effects.

BUILDING REPUTATION FOR CONTRACT RENEWAL: IMPLICATIONS FOR PERFORMANCE DYNAMICS AND CONTRACT DURATION

IOSSA, ELISABETTA;
2014

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 contractsmay strengthen reputational effects whereas shortterm contracting may be optimal when investment has persistent, long-term effects.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11565/3954920
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