Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration

46 Pages Posted: 10 Dec 2009

See all articles by Elisabetta Iossa

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University; Centre for Economic Policy Research (CEPR)

Patrick Rey

Toulouse School of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: December, 10 2009

Abstract

Due to technological progress, recent performance is often more informative about future performance prospects than is older performance. We incorporate information decay in a career concern model in which performance depends on type and effort and contract renewal is based on the performance record. In contrast with the career concern literature (e.g. Lewis, 1986; RJE), contractors work harder when the project approaches renewal date and when their reputation is better. Productive investment are crowded out by window-dressing effort in late contract periods, but it is boosted in early periods. More frequent contract renewals strengthen reputational effects and result in improved performance if the relative cost of investment is low, but otherwise long-term contracts induce more effort. Our results are corroborated by some empirical studies showing that performance improves as the contract approaches renewal date.

Keywords: Career concerns, contract renewal and dynamic incentives

Suggested Citation

Iossa, Elisabetta and Rey, Patrick, Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration (December, 10 2009). CEIS Working Paper No. 155, Available at SSRN: https://ssrn.com/abstract=1521500 or http://dx.doi.org/10.2139/ssrn.1521500

Elisabetta Iossa (Contact Author)

University of Rome Tor Vergata ( email )

Via Columbia n.2
Rome, 00133
Italy

IEFE Bocconi University ( email )

Via Roentgen 1
Milan, Milan 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Patrick Rey

Toulouse School of Economics ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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