Concepedia

Managerial Incentive Problems: A Dynamic Perspective

The Review of Economic Studies · 1999 · 624 citations · 19 references

Open access

TL;DR

The paper highlights a mismatch between employees’ focus on human‑capital gains and firms’ focus on financial returns, which need only be weakly aligned. The study examines how career concerns affect employees’ effort and job decisions. The model assumes abilities are revealed over time through performance, wages are based on expected output linked to assessed ability, and employees can influence learning and wages by unobserved actions, creating an implicit contract. Career motives can be either beneficial or harmful, depending on the alignment of human‑capital and financial returns.

Abstract

The paper studies how a person's concern for a future career may influence his or her incentives to put in effort or make decisions on the job. In the model, the person's productive abilities are revealed over time through observations of performance. There are no explicit output-contingent contracts, but since the wage in each period is based on expected output and expected output depends on assessed ability, an “implicit contract” links today's performance to future wages. An incentive problem arises from the person's ability and desire to influence the learning process, and therefore the wage process, by taking unobserved actions that affect today's performance. The fundamental incongruity in preferences is between the individual's concern for human capital returns and the firm's concern for financial returns. The two need be only weakly related. It is shown that career motives can be beneficial as well as detrimental, depending on how well the two kinds of capital returns are aligned.