Aligning ambition and incentives

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avisTidsskriftartikelForskningpeer review

  • Alexander Koch
  • Eloïc Peyrache, HEC School of Management, Paris, Frankrig
  • Institut for Økonomi
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.
OriginalsprogEngelsk
TidsskriftJournal of Law, Economics, and Organization
Vol/bind27
Nummer3
Sider (fra-til)655-688
ISSN8756-6222
DOI
StatusUdgivet - okt. 2011

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