TY  - JOUR
AU  - Gibbons,Robert
AU  - Murphy,Kevin J.
TI  - Optimal Incentive Contracts in the Presence of Career Concerns: Theory  and Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3792
PY  - 1992
Y2  - September 1992
UR  - http://www.nber.org/papers/w3792
L1  - http://www.nber.org/papers/w3792.pdf
N1  - Author contact info:
Robert S. Gibbons
MIT Sloan School of Management
100 Main Street, E62-524
Cambridge, MA  02142
Tel: 617/253-0283
Fax: 617/253-2660
E-Mail: rgibbons@mit.edu

Kevin M. Murphy
Booth School of Business
The University of Chicago
5807 S. Woodlawn Ave.
Chicago, IL  60637
Tel: 773/702-7280
Fax: 773/834-3554
E-Mail: murphy@chicagoBooth.edu
AB  - This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.
ER  -