Disclosure of Contract Clauses and Career Concerns

In this study, we analyze a simple moral hazard model in which a risk-neutral agent has career concerns and is protected by limited liability. The agent cares about both career concerns and explicit incentives given by the principal. We consider the following two cases: (i) when the explicit contract is unobservable for the labor market, and (ii) when the principal discloses contract. If the explicit compensation contract is unobservable, the labor market needs to update its belief regarding the agent type on the basis of the realized outcome and the inference of the agent's effort choice. However, if the principal discloses contract clauses, the labor market knows how much effort is planned to be induced. The principal, then, can influence the market's belief through the observable contract. By disclosing contract clauses, the principal can induce a higher level of effort from the agent because she can control career concern incentives directly as well as monetary incentives.