Reputation and career concerns

"This paper studies Holmstrom's [1999] seminal model of career concerns, but considers that a small change in the beliefs about the agent's future productivity may imply a large change in his compensation--because, for example, the agent may be fired or promoted. This allows us to study how the agent's effort decision depends on his current reputation--with reputation we refer to the beliefs about the agent's future productivity. We shall show that the market's and the agent's problems can be written recursively. We find that the relationship between the agent's decisions and his current reputation is typically nonmonotonic: equilibrium effort is hump-shaped over reputation. Furthermore, equilibrium effort may be higher if there is less dispersion in the distribution of abilities; it may be higher later in the agent's career; and it may be higher than the efficient effort level. "--Federal Reserve Bank of Richmond web site.