Learning by Choosing: Career Concerns with Observable Actions
51 Pages Posted: 20 Apr 2020 Last revised: 11 Aug 2022
Date Written: March 14, 2020
This paper explores potential inefficiencies of incomplete contracts in a dynamic career concerns context. In a firm--worker relationship, the worker performs tasks that have tradeoffs between productivity and informativeness. There is no private cost to the worker for choosing any of the tasks and all actions are observable. We show that the first-best outcome can be obtained with short-term contracts if the wage can depend on the task choice. This provides an explanation for wage jumps at promotions---the worker is assigned the more productive but less informative task after promotion. If task choice is not contractible, then inefficiency arises: The worker has an endogenous bias toward choosing the less productive but more informative task, while the firm is biased toward choosing the more productive but less informative task.
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