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

  • Iossa, Elisabetta
  • Rey, Patrick

We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity is a stochastic function of his past productivity and 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9571.

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Date of creation: Jul 2013
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Handle: RePEc:cpr:ceprdp:9571
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