Career concerns, multiple tasks, and short-term contracts

Abstract

We study optimal incentive contracts when commitments are limited, and agents have multiple tasks and career concerns. The agent career concerns are determined by the outside market. We show that the optimal compensation contract optimizes the combination of implicit incentives from both career concerns and ratchet effects. In contrast to existing results, implicit and explicit incentives might be complements, and the principal might want to give strongest explicit incentives for agents far from retirement to account for the fact that career concerns might induce behavior in conflict with the principal’s preferences. Furthermore, we show that maximized welfare might be decreasing in the strength of the career concerns, and that optimal incentives might be both positively and negatively correlated with various measures of uncertainty.