Evidence on Explicit and Implicit Incentives in a Competitive Labor Market

The authors study the role of explicit and implicit incentives in a competitive labor market with no internal promotion opportunities. In the setting of National Collegiate Athletic Association (NCAA) head football coaches, the authors find that compensation changes from career outcomes and increases from renegotiation are significantly greater than explicit bonuses. At the same time, the authors find that explicit incentives increase as implicit incentives from outside opportunities weaken. Overall, the authors show that the labor market provides strong implicit incentives by rewarding coaches for good performance while penalizing them with weaker employment opportunities following poor performance. The authors' findings demonstrate the significance of implicit incentives in the presence of a strong external labor market and suggest that the optimal use of explicit incentives is tempered by implicit incentives from the labor market.