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Mixed up? that’s good for motivation

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Abstract

We show that career concerns can arise in the absence of ex ante uncertainty about an agent’s type, if his unobservable actions influence future productivity. Implementing effort in mixed strategies allows the principal to endogenously introduce uncertainty about the agent’s ex post productivity and generate reputational incentives. Creating such ambiguity can be optimal for the principal, even though this exposes the agent to additional risk and reduces output. This finding for an environment with imperfect commitment contrasts with standard agency models, where implementing mixed strategy actions typically is not optimal if pure strategies can also be implemented.

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Authors and Affiliations

  1. Department of Economics, Royal Holloway, University of London, Egham, TW20 0EX, UK

    Alexander K. Koch

  2. Department of Economics and Finance, HEC School of Management, 1 rue de la libération, 78351, Jouy-en-Josas, France

    Eloïc Peyrache

Authors
  1. Alexander K. Koch
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  2. Eloïc Peyrache
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Corresponding author

Correspondence to Alexander K. Koch.

Additional information

We benefited from helpful comments from Jacques Crémer, Uli Hege, Bruno Jullien, Wolfgang Köhler, Albrecht Morgenstern, Georg Nöldeke, Frédéric Palomino, Patrick Rey, Bernard Salanié, Burkhard Schipper, and Patrick Schmitz. Moreover, we thank two anonymous referees for their comments, which helped to significantly improve the paper.

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Koch, A.K., Peyrache, E. Mixed up? that’s good for motivation. Economic Theory 34, 107–125 (2008). https://doi.org/10.1007/s00199-007-0206-y

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  • DOI: https://doi.org/10.1007/s00199-007-0206-y

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