Mixed up? That's good for motivation
AbstractAn essential ingredient in models of career concerns is ex ante uncertainty about an agent’s type. This paper shows how career concerns can arise even in the absence of any such ex ante uncertainty, if the unobservable actions that an agent takes influence his future productivity. By implementing effort in mixed strategies the principal can endogenously induce uncertainty about the agent’s ex post productivity and generate reputational incentives. Our main result is that creating such ambiguity can be optimal for the principal, even though this exposes the agent to additional risk and reduces output. This finding demonstrates the importance of mixed strategies in contracting environments with imperfect commitment, which contrasts with standard agency models where implementing mixed strategy actions typically is not optimal if pure strategies are also implementable.
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Bibliographic InfoPaper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 04/22.
Length: 16 pages
Date of creation: Sep 2004
Date of revision: Sep 2004
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Other versions of this item:
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- 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
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executives; Executive Compensation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-10-18 (All new papers)
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