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• Even if there is no explicit incentive compensation, individuals may want to work hard in order to establish a reputation for their future career
• Under Bayesian updating, the posterior beliefs about a person's ability is a weighted sum of the prior mean and the observed output. So if a person exerts greater effort to increase output, people would believe he has greater ability and hence he would command a higher future wage rate in the market.
• Such an incentive to exert effort is
  • stronger for young workers than for old workers
  • increasing in the discount factor
  • decreasing in the variance of output measures

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Lecture Notes