BUILDING REPUTATION FOR CONTRACT RENEWAL: IMPLICATIONS FOR PERFORMANCE DYNAMICS AND CONTRACT DURATION

We study how career concerns affect the dynamics of incentives in a multi‐period contract, when the agent's productivity is a stochastic function of his past productivity and investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long‐term contracts may strengthen reputational effects whereas short‐term contracting may be optimal when investment has persistent, long‐term effects.