31 Pages Posted: 15 Nov 2002
This paper examines contract-related incentive effects using a unique dataset on individual performance and individual contracts. Evidence from professional basketball players in the 1980s and 1990s supports the main predictions of a model of worker effort as individual performance improves in the year before signing a multi-year contract, but declines after the contract is signed. This is consistent with an observed salary structure that rewards both historical performance and recent improvement, and thus provides strong incentives to increase effort and improve performance before signing a multi-year contract. The incentive effects appear important as team outcomes improve substantially when more players are competing for new contracts, but decline when more players have just signed multi-year contracts. These results highlight the double-edge nature of long-term contracts: good for employers when workers are fighting for them, but less so when workers have them.
Keywords: incentives, contracts
JEL Classification: J31, J33
Suggested Citation: Suggested Citation