Incentives from Career Concerns in a Contract Package: An Empirical Investigation

Abstract

This paper empirically studies the extent to which career concerns as part of a typical contract offer influence employees’ work performance in a Japanese auto dealership firm. Because career movements and base-wage adjustments rely on performance evaluation over time, we develop a dynamic structural model that allows concerns for future payoffs to impact an employee’s current work effort. A reform in personnel-management policies of the firm during the data period enables us not only to compare the performances across individuals, but also to compare within an individual the performance before and after the reform—this enhances the model identification. Our estimation results show that the added value from career movements on top of the monetary payoffs is more important than the monetary payoffs. Individuals respond to career movements and commissions differently, mainly due to varying cost of effort and different payoffs from career movements. Our counterfactual exercises suggest that, compared with the scenario when there is only monetary compensation, adding career movements in a contract package will greatly improve the firm’s gross profit. The firm can improve its net profit by making commission and promotion more performance-based. This paper was accepted by Matt Shum, marketing. Funding: Financial support from the Social Sciences and Humanities Research Council of Canada [Grant 20190410-01] is gratefully acknowledged. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4956 .