Optimal Incentive Contracts under Moral Hazard When the Agent Is Free to Leave

Florian Englmaier, Gerd Muehlheusser () and Andreas Roider
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Gerd Muehlheusser: University of Hamburg

No 5027, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We characterize optimal incentive contracts in a moral hazard framework extended in two directions. First, after effort provision, the agent is free to leave and pursue some ex-post outside option. Second, the value of this outside option is increasing in effort, and hence endogenous. Optimal contracts may entail properties such as inducing first-best effort and surplus, or non-responsiveness with respect to changes in verifiable parameters. Moreover, while always socially inefficient, separation might occur in equilibrium. Except for the latter, these findings are robust to renegotiation. When the outside option is exogenous instead, the standard results obtain.

Keywords: moral hazard; limited commitment; ex-post outside option; limited liability (search for similar items in EconPapers)
JEL-codes: D82 D86 K31 M52 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2010-06
New Economics Papers: this item is included in nep-bec and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

Published - revised version published as 'Optimal Incentive Contracts for Knowledge Workers' in: European Economic Review, 2014, 67, 82-106

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Related works:
Working Paper: Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave (2010)
Working Paper: Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave (2010)
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