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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Date of creation: Sep 1992
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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.
- Murphy, K.J. & Gibbons, R., 1990. "Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence," Papers 90-09, Rochester, Business - Managerial Economics Research Center.
- 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.
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