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.