Department of Economics and Business Economics

Aligning ambition and incentives

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

  • Alexander Koch
  • Eloïc Peyrache, HEC School of Management, Paris, France
  • School of Economics and Management
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.
Original languageEnglish
JournalJournal of Law, Economics, and Organization
Pages (from-to)655-688
Publication statusPublished - Oct 2011

    Research areas

  • Reputation, Asymmetric learning, Relative performance contracts, Transparency

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