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Sustaining implicit contracts when agents have career concerns: the role of information disclosure

Authors


  • This article is based on Chapter 2 of my Ph.D. dissertation (Mukherjee, 2005b) at Northwestern University. I would like to thank Michael Whinston for his invaluable guidance and support throughout this project. I am also indebted to Scott Schaefer for his extremely helpful suggestions. For their helpful comments, I would also like to thank the editor, Mark Armstrong, two anonymous referees, Ales Filipi, Jonathan Levin, Dale Mortensen, Alessandro Pavan, Marcin Peski, Lois Spreen, and seminar participants at Pennsylvania State University and 2006 North American summer meetings of the Econometric Society, Minneapolis. Financial support from the Center for the Study of Industrial Organization, Northwestern University, and Bates White Research Enhancement Grant are gratefully acknowledged. All the errors that remain are mine.

Abstract

Firms often augment career concerns incentives with implicit incentive contracts. I formalize the interaction between these two incentives, and highlight its implications on a firm's decision to disclose its workers' productivity information. Disclosure enhances career concerns but inhibits implicit contracts. I show two main results. First, implicit contracts weaken (i.e., substitute) career concerns if the prior belief about the worker's ability is low, and vice versa. Second, when these incentives are substitutes, the optimal disclosure policy follows a cutoff rule: patient firms are opaque, and transparent firms never offer implicit contracts. These results need not hold if the incentives are complements.

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