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

Florian Englmaier, Gerd Muehlheusser and Andreas Roider

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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)
Date: 2010-07
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Citations: View citations in EconPapers (63)

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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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