Contracting with private rewards

Rene Kirkegaard

RAND Journal of Economics, 2020, vol. 51, issue 2, 589-612

Abstract: The canonical moral hazard model is extended to allow the agent to face endogenous and noncontractible uncertainty. The agent works for the principal and simultaneously pursues outside rewards. The contract offered by the principal thus manipulates the agent's work–life balance. The participation constraint is slack whenever it is optimal to distort the agent's work–life balance away from life compared to a symmetric‐information benchmark. Then, the agent's expected utility is high and he faces flatter incentives. Such contracts may be optimal when the two activities are strong substitutes in the agent's cost function or when reservation utility is low.

Date: 2020
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https://doi.org/10.1111/1756-2171.12326

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Working Paper: Contracting with Private Rewards (2015)
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