Article

Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration

Elisabetta Iossa, and 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; contract duration; contract renewal; reputation and dynamic incentives;

JEL codes

  • D21: Firm Behavior: Theory
  • D23: Organizational Behavior • Transaction Costs • Property Rights
  • D86: Economics of Contract: Theory
  • L24: Contracting Out • Joint Ventures • Technology Licensing
  • L51: Economics of Regulation

Replaces

Elisabetta Iossa, and Patrick Rey, Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration, TSE Working Paper, n. 12-368, November 2012.

See also

Published in

Journal of the European Economic Association, vol. 12, n. 3, June 2014, pp. 549–574