Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/33412
Authors: 
Koch, Alexander K.
Peyrache, Eloïc
Year of Publication: 
2005
Series/Report no.: 
IZA Discussion Papers 1841
Abstract: 
Young professionals typically do not enter into life-long employment relations with a single firm. Therefore, future employers can learn about individuals' abilities from the observable facts regarding earlier work relations. We show that these informational spill-overs have profound implications for organizational design and the resulting optimal incentive contracts. Through the organizational choice and the contracts that it offers individuals, a firm can strategically manipulate the flow of information to future employers and sharpen incentives. Using a simple moral hazard model, we demonstrate that relative performance contracts, such as rank-order tournaments, can be optimal even though the extant explanations for the optimality of such compensation schemes are absent. The paper discusses the distortions that can arise and explores the robustness of the result.
Subjects: 
tournaments
reputation
asymmetric learning
relative performance contracts
JEL: 
D82
J33
L14
M52
Document Type: 
Working Paper

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