Working paper
Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration
Elisabetta Iossa, and Patrick Rey
IDEI Working Paper
n. 757, November 2012
Reference
Elisabetta Iossa, and Patrick Rey, “Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration”, IDEI Working Paper, n. 757, November 2012.
Abstract
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.
Keywords
Career concerns; contract duration; contract renewal; reputation and dynamic incentives;