Contracting with a Long-Horizon Agent on a Short-Term Project

Abstract

We analyze a setting in which a short-term project is executed by an agent who has a long-term horizon, which is manifested in the form of career concerns. In particular, the agent may have an incentive to take actions that are not completely compatible with the interests of the hiring principal, in order to inform the labor market of the agent's abilities. We find that the relation between the incentive weight on a contractible performance measure and the noise in that measure depends on the strength of the career concerns. We further show that the decision to disclose a performance measure that the labor market uses to update beliefs about the agent's ability depends on both the strength of the career concerns and the compatibility of non-contractible outcomes with the principal's interests. The results have direct implications for the ongoing debate regarding whether firms should make more transparent the basis on which executive compensation is paid.

Keywords: Career Concerns, Agent Horizon, Performance Measures

JEL Classification: J31, M41, M52