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The Optimal Duration of Contracts

Panu Poutvaara (), Tuomas Takalo and Andreas Wagener

No 6808, CESifo Working Paper Series from CESifo Group Munich

Abstract: We study the optimal duration of contracts in a principal-agent framework with both moral hazard and adverse selection. Agents decide on a contract-specific and non-verifiable investment. Incentive compatibility requires that initial contracts, which serve to screen the ability of newly hired agents, cannot be longer than continuation contracts, offered to successful agents. Initial contracts remain unpaid unless service quality is unobservable to other agents and the share of high-ability agents is high. Optimal durations depend, in non-monotonic ways, on the principal’s ow valuation of the agent’s service and the share of high-ability agents.

Keywords: contract length; term length; screening (search for similar items in EconPapers)
JEL-codes: J30 L14 J41 D72 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hrm, nep-mic and nep-reg
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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