Mixed Up? That's Good for Motivation

Alexander Koch and Eloic Peyrache ()
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Eloic Peyrache: HEC Paris

No 1331, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: An essential ingredient in models of career concerns is ex ante uncertainty about an agent's type. This paper shows how career concerns can arise even in the absence of any such ex ante uncertainty, if the unobservable actions that an agent takes influence his future productivity. By implementing effort in mixed strategies the principal can endogenously induce uncertainty about the agent's ex post productivity and generate reputational incentives. Our main result is that creating such ambiguity can be optimal for the principal, even though this exposes the agent to additional risk and reduces output. This finding demonstrates the importance of mixed strategies in contracting environments with imperfect commitment, which contrasts with standard agency models where implementing mixed strategy actions typically is not optimal if pure strategies are also implementable.

Keywords: mixed strategies; incentive contracts; reputation (search for similar items in EconPapers)
JEL-codes: D80 J33 L14 M12 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2004-10
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Citations: View citations in EconPapers (1)

Published - published in : Economic Theory , 2008, 34 (1), 107-125

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Journal Article: Mixed up? that’s good for motivation (2008)
Working Paper: Mixed up? That's good for motivation (2004)
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