Career concerns with exponential learning

Abstract

This paper examines the interplay between career concerns and market structure. Ability and effort are complements: effort increases the probability that a skilled agent achieves a one-time breakthrough.Wages are based on assessed ability and on expected output. Effort levels at different times are strategic substitutes and, as a result, the unique equilibrium effort and wage paths are single-peaked with seniority.Moreover, for any wage profile, the agent works too little, too late. Com- mitment to wages by competing firms mitigates these inefficiencies. In that case, the optimal contract features piecewise constant wages and severance pay.