Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence
AbstractThis paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.
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Bibliographic InfoPaper provided by Rochester, Business - Managerial Economics Research Center in its series Papers with number 90-09.
Length: 47 pages
Date of creation: 1990
Date of revision:
Contact details of provider:
Postal: UNIVERSITY OF ROCHESTER, MANAGERIAL ECONOMICS RESEARCH CENTER, WILLIAM E. SIMON GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, ROCHESTER NEW YORK 14627 U.S.A
Web page: http://www.simon.rochester.edu/
More information through EDIRC
contracts ; compensation ; capital market;
Other versions of this item:
- Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
- Robert Gibbons & Kevin J. Murphy, 1991. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," NBER Working Papers 3792, National Bureau of Economic Research, Inc.
- Gibbons, R. & Murphy, K.J., 1990. "Optimal Incentive Contracts In The Presence Of Career Concerns: Theory And Evidence," Working papers 563, Massachusetts Institute of Technology (MIT), Department of Economics.
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.:
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