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; USC Gould School of Law

July 1991

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 (July 1991). 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)

USC Gould School of Law
699 Exposition Boulevard
Los Angeles, CA 90089
United States

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