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Mixed up? That's good for motivation

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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File URL: http://www.rhul.ac.uk/economics/Research/WorkingPapers/pdf/dpe0422.pdf
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Paper 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.

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Length: 16 pages
Date of creation: Sep 2004
Date of revision: Sep 2004
Handle: RePEc:hol:holodi:0422
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  1. Meyer, Margaret A & Vickers, John, 1995. "Performance Comparisons and Dynamic Incentives," CEPR Discussion Papers 1107, C.E.P.R. Discussion Papers.
  2. 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.
  3. 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.
  4. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The economics of career concerns: part 1 :comparing information structures," ULB Institutional Repository 2013/9617, ULB -- Universite Libre de Bruxelles.
  5. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
  6. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. 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.
  8. John Fingleton, 2005. "Career Concerns of Bargainers," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(1), pages 179-204, April.
  9. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  10. Koessler, Frederic, 2004. "Strategic knowledge sharing in Bayesian games," Games and Economic Behavior, Elsevier, vol. 48(2), pages 292-320, August.
  11. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  12. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  13. Shin Hyun Song, 1994. "The Burden of Proof in a Game of Persuasion," Journal of Economic Theory, Elsevier, vol. 64(1), pages 253-264, October.
  14. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May.
  15. Borland, Jeff, 1992. " Career Concerns: Incentives and Endogenous Learning in Labour Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 6(3), pages 251-70.
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