Aligning Ambition and Incentives

Alexander Koch and Eloïc Peyrache ()
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Eloïc Peyrache: School of Economics and Management, University of Aarhus, Denmark, Postal: 8000 Aarhus C, Denmark

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Labor turnover creates longer term career concerns incentives that motivate employees in addition to the short term monetary incentives provided by the current employer. We analyze how these incentives interact and derive implications for the design of incentive contracts and organizational choice. The main insights stem from a trade-off between ‘good monetary incentives’ and ‘good reputational incentives’. We show that the principal optimally designs contracts to create ambiguity about agents’ abilities. This may make it optimal to contract on relative performance measures, even though the extant rationales for such schemes are absent. Linking the structure of contracts to organizational design, we show that it can be optimal for the principal to adopt an opaque organization where performance is not verifiable, despite the constraints that this imposes on contracts.

Keywords: Reputation; Asymmetric learning; Relative performance contracts; Transparency (search for similar items in EconPapers)
JEL-codes: D82 J33 L14 (search for similar items in EconPapers)
Pages: 36
Date: 2008-11-05
New Economics Papers: this item is included in nep-bec, nep-cta and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://repec.econ.au.dk/repec/afn/wp/08/wp08_16.pdf (application/pdf)

Related works:
Journal Article: Aligning Ambition and Incentives (2011)
Working Paper: Aligning Ambition and Incentives (2011)
Working Paper: Aligning Ambition and Incentives (2005)
Working Paper: Aligning Ambition and Incentives (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2008-16

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