REPUTATIONAL CONCERNS AND MANAGERIAL INCENTIVES IN INVESTMENT DECISIONS

I consider managerial incentives in investment decisions. In the model , a manager obtains private signals on projects, the informative conte nts of which depend on his ability. I show that in spot market equilib ria, the manager, concerned about his market reputation, disregards in formative signals in early periods of his career. Considering long-ter m contracts to remedy such inefficiency, I find that for a risk-neutra l manager, wage guarantees may implement an efficient investment rule, while for a risk-averse manager, the optimal contract must trade off investment efficiency for intertemporal consumption-smoothing and risk -sharing. (C) 1998 Elsevier Science B.V. All rights reserved.