Optimal incentive contracts for knowledge workers

Florian Englmaier, Gerd Muehlheusser and Andreas Roider

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: We study optimal incentive provision for "knowledge workers", a crucial resource for many organizations. We augment a standard moral-hazard framework to reflect two key patterns: First, retention is a challenge because workers are free to leave; thereby harming their employer. Second, the value of the workerU+05F3s outside option might depend on effort on the job. Optimal contracts that retain workers exhibit properties such as first-best effort and surplus, or non-responsiveness to changes in underlying conditions. Due to large rents, full retention is, however, costly for employers. Hence, even when socially inefficient, separation might occur in equilibrium. © 2014 Elsevier B.V.

Date: 2014
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Published in European Economic Review 67(2014): pp. 82-106

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