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Mixed Up? That's Good for Motivation

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Author Info
Koch, Alexander K. () (Royal Holloway, University of London and IZA Bonn)
Peyrache, Eloic (HEC School of Management, Paris)

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Abstract

An 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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1331.

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Length: 17 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1331

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Related research
Keywords: incentive contracts; reputation; mixed strategies;

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Find related papers by JEL classification:
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; Executive Compensation

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References listed on IDEAS
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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    Other versions:
  3. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter. [Downloadable!] (restricted)
  4. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November. [Downloadable!] (restricted)
    Other versions:
  5. Dewatripont, Mathias & Jewitt, Ian & Tirole, Jean, 1999. "The Economics of Career Concerns, Part I: Comparing Information Structures," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 183-98, January. [Downloadable!] (restricted)
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  9. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September. [Downloadable!] (restricted)
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  10. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  11. Emmanuelle Auriol & Guido Friebel & Lambros Pechlivanos, 2002. "Career Concerns in Teams," Journal of Labor Economics, University of Chicago Press, vol. 20(2), pages 289-307, Part. [Downloadable!]
  12. Borland, Jeff, 1992. " Career Concerns: Incentives and Endogenous Learning in Labour Markets," Journal of Economic Surveys, Blackwell Publishing, vol. 6(3), pages 251-70.
  13. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn. [Downloadable!] (restricted)
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  14. B. Douglas Bernheim & Michael D. Whinston, 1997. "Incomplete Contracts and Strategic Ambiguity," Harvard Institute of Economic Research Working Papers 1787, Harvard - Institute of Economic Research.
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  15. Koessler, Frederic, 2004. "Strategic knowledge sharing in Bayesian games," Games and Economic Behavior, Elsevier, vol. 48(2), pages 292-320, August. [Downloadable!] (restricted)
  16. John Fingleton, 2005. "Career Concerns of Bargainers," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(1), pages 179-204, April. [Downloadable!] (restricted)
  17. Alexander K. Koch & Eloic Peyrache, 2005. "Aligning Ambition and Incentives," Royal Holloway, University of London: Discussion Papers in Economics 05/03, Department of Economics, Royal Holloway University of London, revised Mar 2005. [Downloadable!]
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(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 K. Koch & Eloïc Peyrache, 2008. "Aligning Ambition and Incentives," Economics Working Papers 2008-16, School of Economics and Management, University of Aarhus. [Downloadable!]
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