Theory Work

Career Concerns, Firm-Specific Fit, and Contract Choice

This paper develops a two-period model of career concerns and contract choice in a competitive labor market with firm-specific complementarities. Extending the framework of Holmstrom 1999, output depends on both the agent's general ability and a stochastic, firm-specific positional value that is independent of the agent's effort. Two firms compete for the agent using spot or long-term contracts, while the agent chooses effort in response to career concerns.  The model delivers two results. First, when firms are symmetric, a long-term contracting equilibrium exists provided the positional rent promised to the agent under a long-term contract overcomes both the effort gains from spot contracting and the expected positional rent available next period in a competitive market, a condition that holds only for an interior range of positional need probabilities. Second, when firms are asymmetric, the disadvantaged firm offers a long-term contract to credibly compete, forcing the advantaged firm to pay a wage premium under spot contracting to retain the agent. In both cases, long-term contracts emerge as the instrument through which agents extract positional rent that would otherwise remain a hidden surplus for the firm.

Check out the interactive visual below which highlights the key results of the paper!

more details coming soon!