Economic Quarterly

In modern corporations, ownership is typically separate from control. Given that employees are motivated by self interest, incentive problems arise. Employees are disciplined, in part, by their career concerns. Employees' compensation depends on their reputations—the labor market's beliefs about their future productivity. The labor market learns about the employees' future productivity by observing their performance. Therefore, when the employees decide their actions, they care about their performance (and the performance of the firms they work for) because their performance influences their reputation. However, career concerns do not necessarily eliminate the inefficiencies created by the separation of ownership and control.