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Working paper

Short-Term versus Long-Term Incentives

Morfov S. G.
This paper considers the provision of long-term incentives in a principal-agent model with effort persistence. We analyze how the degree of substitutability between short- and long-term tasks affects compensation and the optimal contract. We demonstrate that a long-term contract with no threat of interim replacement can focus on short-term incentives because of an interaction between agent's effort choice and the value of his outside option.