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The Right to Quit Work: An Efficiency Rationale for Restricting the Freedom of Contract

Daniel Müller and Patrick Schmitz

MPRA Paper from University Library of Munich, Germany

Abstract: A principal hires an agent to provide a verifiable service. Initially, the agent can exert unobservable effort to reduce his disutility from providing the service. If the agent is free to waive his right to quit, he may voluntarily sign a contract specifying an inefficiently large service level, while there are insufficient incentives to exert effort. If the agent's right to quit is inalienable, the underprovision of effort may be further aggravated, but the service level is ex post efficient. Overall, it turns out that the total surplus can be larger when agents are not permitted to contractually waive their right to quit work. Yet, we also study an extension of our model in which even the agent can be strictly better off when the parties have the contractual freedom to waive the agent's right to quit.

Keywords: Moral hazard; Incentive theory; Labor contracts; Efficiency wages; Law and economics (search for similar items in EconPapers)
JEL-codes: D23 D86 J83 K12 K31 M55 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-lab, nep-law and nep-mic
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Related works:
Journal Article: The right to quit work: An efficiency rationale for restricting the freedom of contract (2021) Downloads
Working Paper: The Right to Quit Work: An Efficiency Rationale for Restricting the Freedom of Contract (2020) Downloads
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