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

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  • Iossa, Elisabetta
  • Rey, Patrick

Abstract

We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity can evolve exogenously (random shocks) or improve endogenously through 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.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 757.

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Date of creation: Nov 2012
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Publication status: Published in Journal of the European Economic Association.
Handle: RePEc:ide:wpaper:26678

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Keywords: Career concerns; contract duration; contract renewal; reputation and dynamic incentives.;

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References

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  1. Iossa, Elisabetta & Rey, Patrick, 2012. "Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration," TSE Working Papers 12-368, Toulouse School of Economics (TSE).
  2. Matthew Ellman, 2006. "The optimal length of contracts with application to outsourcing," Economics Working Papers 965, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Stéphane SAUSSIER, 1999. "Transaction Cost Economics and Contract Duration : An Empirical Analysis of EDF Coal Contracts," Discussion Papers (REL - Recherches Economiques de Louvain) 1999011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  4. Oriana Bandiera, 2007. "Contract Duration and Investment Incentives: Evidence from Land Tenancy Agreements," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 953-986, 09.
  5. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  6. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-85, March.
  7. Tracy R. Lewis, 1986. "Reputation and Contractual Performance in Long-Term Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 141-157, Summer.
  8. Richard A. Lambert, 1983. "Long-Term Contracts and Moral Hazard," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 441-452, Autumn.
  9. Spagnolo, Giancarlo, 2012. "Reputation, competition, and entry in procurement," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 291-296.
  10. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  11. Nicola Doni, 2006. "The Importance Of Reputation In Awarding Public Contracts," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 401-429, December.
  12. Kim, In-Gyu, 1998. "A model of selective tendering: Does bidding competition deter opportunism by contractors?," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(4), pages 907-925.
  13. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-93, December.
  14. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  15. Calzolari, Giacomo & Spagnolo, Giancarlo, 2009. "Relational Contracts and Competitive Screening," CEPR Discussion Papers 7434, C.E.P.R. Discussion Papers.
  16. Eshien Chong & Freddy Huet & Stéphane Saussier, 2006. "Auctions, Ex Post Competition And Prices: The Efficiency Of Public-Private Partnerships ," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 521-554, December.
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Citations

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Cited by:
  1. Elisabetta Iossa & Patrick Rey, 2010. "Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration," CEIS Research Paper 155, Tor Vergata University, CEIS, revised 28 May 2010.
  2. Gilles Edouard Espinosa & Caroline Hillairet & Benjamin Jourdain & Monique Pontier, 2013. "Reducing the debt : is it optimal to outsource an investment?," Papers 1305.4879, arXiv.org.
  3. Spagnolo, Giancarlo, 2012. "Reputation, competition, and entry in procurement," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 291-296.
  4. Spagnolo, Giancarlo & Bergman, Mats A. & Lundberg, Sofia, 2012. "Privatization and Quality: Evidence from Elderly Care in Sweden," SITE Working Paper Series 19, Stockholm Institute of Transition Economics, Stockholm School of Economics.

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