Job Design in the Presence of Career Concerns

We reconsider the job design theory of Holmstrom and Milgrom to include career concerns. When agents are motivated by their reputation, the discretion to pursue outside activities plays an integral part in the incentive scheme. Discretion can be a useful instrument to enhance incentives and prevent the adverse selection of low-ability agents. We argue that these synergies are useful in explaining, among other examples, the employment of US faculty members and of physicians in dual health care systems.