Incentives To Invest In Short-Term Vs. Long-Term Contracts: Evidence From A Natural Experiment

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In this paper, the authors study the effects of the change in contract length on the agents' incentives to invest and exert effort. They present an agent's dynamic decision model that explicitly deals with two types of investments and directly allows for contract regime switching by varying the probability of contract renewal parameter. The fact that the unobservable investment in human capital is complementary with the agent's effort produces a result that increasing the probability of contract renewal increases investment and effort, with the consequent increase in production.