Robust Contracting with Career Concerns

Abstract

We study optimal contracting when workers face career concerns. Labor markets infer ability from performance, but effort affects how informative performance is. This feedback can generate strategic uncertainty: bonuses inducing effort under optimistic beliefs about effort may fail under pessimistic beliefs. We characterize this force through a criterion tied to skill-effort complementarity and solve for the least-cost policy implementing effort in every equilibrium. Under strategic uncertainty, the employer uses dispersed bonuses. High bonuses rule out pessimistic beliefs, raising the reputational stakes and letting lower bonuses motivate effort. Pay dispersion among observationally identical workers grows with career concerns and skill-wage assortativeness.