DP9571 Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration
Author(s): | Elisabetta Iossa, Patrick Rey |
Publication Date: | July 2013 |
Keyword(s): | career concerns, career duration, contract renewal, dynamic incentives, reputation |
JEL(s): | D21, D23, D86, L24, L51 |
Programme Areas: | Industrial Organization |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=9571 |
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.