Long-Term Employment Relations When Agents are Present Biased

Florian Englmaier, Matthias Fahn and Marco Schwarz

No 13227, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze how agents' present bias affects optimal contracting in an infinite-horizon employment setting. The principal maximizes profits by offering a menu of contracts to naive agents: a "virtual" contract - which agents plan to choose in the future - and a "real" contract which they end up choosing. This virtual contract motivates the agent and allows the principal to keep the agent below his outside option. Moreover, under limited liability, implemented effort can be inefficiently high. With a finite time horizon, the degree of exploitation of agents decreases over the life-cycle. While the baseline model abstracts from moral hazard, we show that the result persists also when allowing for non-contractible effort.

Keywords: Employment relations; Dynamic contracting; Present bias (search for similar items in EconPapers)
JEL-codes: D03 D21 J31 M52 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-lma and nep-mic
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Related works:
Working Paper: Long-Term Employment Relations when Agents Are Present Biased (2017)
Working Paper: Long-Term Employment Relations when Agents are Present Biased (2016)
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