Pay to Quit and Team Incentives

Pak Hung Au

Journal of the European Economic Association, 2020, vol. 18, issue 2, 964-1008

Abstract: This paper examines the optimal compensation scheme, job design, and severance policy for a team using a model of repeated moral hazard. In the optimal contract, the agent may be paid to quit after a poor performance. We show that a generous severance policy facilitates the adoption of team incentives and team-based production by making it cost-effective to implement peer monitoring and sanction among the agents.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:18:y:2020:i:2:p:964-1008.

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