| Abstract: | We analyze ways in which heterogeneity in responsiveness to incentives (“drive”) affects employees' incentives and firms' incentive systems in a career concerns model. On the one hand, because more driven agents work harder in response to existing incentives than less driven ones—and therefore pay is increasing in perceived drive—there is a motive to increase effort to signal high drive. These “drive‐signaling incentives” are strongest with intermediate levels of existing incentives. On the other hand, because past output of a more driven agent will seem to the principal to reflect lower ability, there is an incentive to decrease effort to signal low drive. The former effect dominates early in the career, and the latter effect dominates towards the end. To maximize incentives, the principal wants to observe a noisy measure of the agent's effort—such as the number of hours he works—early but not late in his career. (JEL: C70, D82, D23) |
