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Contracting with private rewards

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  • René Kirkegaard

Abstract

The canonical moral hazard model is extended to allow the agent to face endogenous and noncontractible uncertainty. The agent works for the principal and simultaneously pursues outside rewards. The contract offered by the principal thus manipulates the agent's work–life balance. The participation constraint is slack whenever it is optimal to distort the agent's work–life balance away from life compared to a symmetric‐information benchmark. Then, the agent's expected utility is high and he faces flatter incentives. Such contracts may be optimal when the two activities are strong substitutes in the agent's cost function or when reservation utility is low.

Suggested Citation

  • René Kirkegaard, 2020. "Contracting with private rewards," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 589-612, June.
    • Handle: RePEc:bla:randje:v:51:y:2020:i:2:p:589-612
    DOI: 10.1111/1756-2171.12326
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    Cited by:

    1. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    2. René Kirkegaard, 2020. "Contracting with private rewards," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 589-612, June.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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