- Even if there is no explicit incentive compensation, individuals
may want to work hard in order to establish a reputation for their
- 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