We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity can evolve exogenously (random shocks) or improve endogenously through 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.
Career concerns; contract duration; contract renewal; reputation and dynamic incentives;
Elisabetta Iossa, and Patrick Rey, “Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration”, Journal of the European Economic Association, vol. 12, n. 3, June 2014, pp. 549–574.
TSE Working Paper, n. 12-368, November 2012