Author(s):	Marina Halac, Andrea Prat
Publication Date:	June 2014
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Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=10035

We study a dynamic agency problem with two-sided moral hazard: the worker chooses whether to exert effort or shirk; the manager chooses whether to invest in an attention technology to recognize worker performance. In equilibrium the worker uses past recognition to infer managerial attention. An engagement trap arises: absent recent recognition, both worker effort and managerial investment decrease, making a return to high productivity less likely as time passes. In a sample of ex-ante identical firms, firm performance, managerial quality, and worker engagement display heterogeneity across firms, positive correlation, and persistence over time.