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Aligning Ambition and Incentives

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Author Info
Alexander K. Koch
Eloïc Peyrache () (School of Economics and Management, University of Aarhus, Denmark)

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Abstract

Labor turnover creates longer term career concerns incentives that motivate employees in addition to the short term monetary incentives provided by the current employer. We analyze how these incentives interact and derive implications for the design of incentive contracts and organizational choice. The main insights stem from a trade-off between ‘good monetary incentives’ and ‘good reputational incentives’. We show that the principal optimally designs contracts to create ambiguity about agents’ abilities. This may make it optimal to contract on relative performance measures, even though the extant rationales for such schemes are absent. Linking the structure of contracts to organizational design, we show that it can be optimal for the principal to adopt an opaque organization where performance is not verifiable, despite the constraints that this imposes on contracts.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2008-16.

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Length: 36
Date of creation: 05 Nov 2008
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Handle: RePEc:aah:aarhec:2008-16

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Related research
Keywords: Reputation; Asymmetric learning; Relative performance contracts; Transparency;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexander Koch & Eloïc Peyrache, 2008. "Mixed up? that’s good for motivation," Economic Theory, Springer, vol. 34(1), pages 107-125, January. [Downloadable!] (restricted)
    Other versions:
  2. Alexander K. Koch & Eloïc Peyrache, 2008. "Aligning Ambition and Incentives," Economics Working Papers 2008-16, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
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