This paper explores potential inefficiencies of incomplete contracts in a dynamic career concerns context. In a firm-worker relationship, the worker performs public tasks that have trade-offs between productivity and informativeness. We show that the first-best outcome can be obtained with short-term contracts if the wage can depend on the task choice. This 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 inefficiency arises: the worker has an endogenous bias toward informativeness, while the firm is biased toward productivity.
Ke, T. Tony, Christopher Li, and Mikhail Safronov.
"Learning by Choosing: Career Concerns with Observable Actions."
American Economic Journal: Microeconomics,
Asymmetric and Private Information; Mechanism Design
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Economics of Contract: Theory
Human Capital; Skills; Occupational Choice; Labor Productivity
Wage Level and Structure; Wage Differentials
Personnel Economics: Firm Employment Decisions; Promotions