Career concerns occur when workers have private information (about their own ability), AND when revealing this information changes the value of workers' opportunities outside the current firm. In these situations, the labor market will force profit-maximizing employers to reward new, positive information about a worker's productivity by raising the worker's pay. Anticipating this, agents will try to signal positive private information by raising their effort, possibly above economically efficient levels.
Fama, Eugene (1980) Agency Problems and the Theory of the Firm. Journal of Political Economy Vol. 88, No. 2 (Apr., 1980), pp. 288-307 (20 pages)
Fama argued that a manager’s reputation in the labor market should be sufficient to align his/her interests with shareholders’. Because a CEO’s job performance is public information –much like a top academic or athlete— top CEOs will get job offers from other, often larger companies that fully reflect the market’s assessment of their marginal productivity. Fama argued that these “career concerns” were all that was needed to motivate CEOs.
Gibbons, Robert and Kevin J. Murphy (1992) Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence Journal of Political Economy Vol. 100, No. 3 (Jun., 1992), pp. 468-505 (38 pages)
Use a two-period version model of career concerns to derive a testable prediction for CEO pay: Explicit pay-for-performance (b in a linear contract) should be greater when the CEO is near retirement. This is because career concerns --the desire to establish a reputation-- may be sufficient to motivate young workers, but are not effective near the end of the career. They find empirical support for this prediction.
Holmström , Bengt (1999) Managerial Incentive Problems: A Dynamic Perspective The Review of Economic Studies, Volume 66, Issue 1, January 1999, Pages 169–182,
Building on the standard principal-agent model, Holmstrom (1999) assesses Fama’s conjecture when (a) agents’ effort is unobservable (moral hazard), (b) agents have private information on their ability or cost of effort (adverse selection), and (c) there are spot labor markets where past agent performance is public information. In these models, ‘young’ agents signal their ability by working hard. Holmstrom finds that risk-aversion and discounting limit the market’s ability to incentivize agents: Fama’s conjecture is true only under narrow assumptions.
Akerlof, George, “The Economics of Caste and of the Rat Race and Other Woeful Tales,” Quarterly Journal of Economics, 1976, pp. 599–617
Presents a model where the desire to signal ability when young leads to socially excessive effort.
Landers, Renee M, James B Rebitzer, and Lowell J Taylor, “Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms,” American Economic Review, 1996, pp. 329–348.
Using data collected from two large law firms, the authors argue that young lawyers work inefficiently long hours to signal their work ethic in order to advance to partnerships.
Gibbons, Robert and Michael Waldman (1999) "Careers in organizations: Theory and evidence" Chapter 36 in Orley Ashenfelter and David Card, eds. Handbook of Labor Economics Volume 3, Part B, 1999, Pages 2373-2437.
Cisternas, Gonzalo, (2018). “Career Concerns and the Nature of Skills,” AEJ: Micro, 10(2):152-89.
Shows that when effort and skills are direct inputs to production and skills are exogenous, effort can be inefficiently high in the beginning of a career. In contrast, when skills are the only input to production but accumulate through past effort choices, the worker always underinvests in skill acquisition.
Ytsma, Erina, and Jana Gallus. “Recognition and Reputation as Drivers of Open Source Success”. Unpublished paper, Carnegie Mellon University, 2019.
The authors conducted a field experiment on GitHub that varied the publicness of the aggregate feedback (thumbs up or down) that contributors got. The goal is to distinguish the effects of reputation-linked financial incentives (“career concerns”) from non-financial rewards on innovative effort, and how this differs across organizational settings (open source, closed source, inner-source).
Ke, T. Tony, Christopher Li and Mikhail Safronov 2023. Learning by Choosing: Career Concerns with Observable Actions American Economic Journal: Microeconomics, 15 (2): 536-67.
In a dynamic career concerns context, the author studies workers’ choices between public tasks that produce output today and public tasks that signal the agent’s private information. When the wage can depend on the task choice, a first best allocation can be attained, and the author’s model provides an explanation for wage jumps at promotions: The worker is assigned the more productive but less informative task after promotion. If task choice is not contractible, then the worker devotes too much effort to the informative task, compared to what the firm wants.
The authors use three experiments to assess the value of MTurk’s reputation system for employers. They find that “good” employers (who do not decline to pay workers while keeping their work product) pay 40 percent more than other employers, and attract twice as many workers (of the same quality) as other employers. Using natural experiments provided by periods when the reputation system was down, they find that the reputation system attracts work to small, good employers who would otherwise be hard for workers to identify.