A repeated principal-agent model with on-the-job search

Daniel Herbold

No 64, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper analyzes how on-the-job search (OJS) by an agent impacts the moral hazard problem in a repeated principal-agent relationship. OJS is found to constitute a source of agency costs because efficient search incentives require that the agent receives all gains from trade. Further, the optimal incentive contract with OJS matches the design of empirically observed compensation contracts more accurately than models that ignore OJS. In particular, the optimal contract entails excessive performance pay plus efficiency wages. Efficiency wages reduce the opportunity costs of work effort and hence serve as a complement to bonuses. Thus, the model offers a novel explanation for the use of efficiency wages. When allowing for renegotiation, the model generates wage and turnover dynamics that are consistent with empirical evidence. I argue that the model contributes to explaining the concomitant rise in the use of performance pay and in competition for high-skill workers during the last three decades.

Keywords: Repeated Principal-Agent Model; On-the-Job Search; Moral Hazard; Multitasking; Efficiency Wages (search for similar items in EconPapers)
JEL-codes: C73 D82 D86 J33 L14 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cta, nep-gth, nep-hrm, nep-lab, nep-lma and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:64

DOI: 10.2139/ssrn.2479325

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