Abstract

http://ssrn.com/abstract=420290
 
 

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Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence


Robert S. Gibbons


Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)

Kevin J. Murphy


University of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law

September 1992

NBER Working Paper No. w3792

Abstract:     
This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.

Number of Pages in PDF File: 52

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Date posted: June 19, 2004  

Suggested Citation

Gibbons, Robert S. and Murphy, Kevin J., Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence (September 1992). NBER Working Paper No. w3792. Available at SSRN: http://ssrn.com/abstract=420290

Contact Information

Robert S. Gibbons (Contact Author)
Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )
E52-432
MIT
Cambridge, MA 02142
United States
617-253-0283 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Kevin J. Murphy
University of Southern California - Marshall School of Business ( email )
BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

University of Southern California - Department of Economics
3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
USC Gould School of Law
699 Exposition Boulevard
Los Angeles, CA 90089
United States

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