Department of Economics and Business Economics

Aligning Ambition and Incentives

Research output: Working paperResearch

  • 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
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages36
Publication statusPublished - 2008

    Research areas

  • Reputation, Asymmetric learning, Relative performance contracts, Transparency

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ID: 13140317