Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration

Iossa, Elisabetta; Rey, Patrick

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Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration

CEPR Discussion Paper No. DP9571

Posted: 24 Jul 2013

See all articles by Elisabetta Iossa

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University; Centre for Economic Policy Research (CEPR)

Patrick Rey

Toulouse School of Economics; Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: July 2013

Abstract

We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agents 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.

Keywords: career concerns, career duration, contract renewal, dynamic incentives, reputation

JEL Classification: D21, D23, D86, L24, L51

Suggested Citation: Suggested Citation

Iossa, Elisabetta and Rey, Patrick, Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration (July 2013). CEPR Discussion Paper No. DP9571, Available at SSRN: https://ssrn.com/abstract=2297210