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The right to quit work: An efficiency rationale for restricting the freedom of contract

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  • Müller, Daniel
  • Schmitz, Patrick W.

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.

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  • Müller, Daniel & Schmitz, Patrick W., 2021. "The right to quit work: An efficiency rationale for restricting the freedom of contract," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 653-669.
    • Handle: RePEc:eee:jeborg:v:184:y:2021:i:c:p:653-669
    DOI: 10.1016/j.jebo.2021.02.004
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    Cited by:

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    More about this item

    Keywords

    Moral hazard; Incentive theory; Labor contracts; Efficiency wages; Law and economics;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J83 - Labor and Demographic Economics - - Labor Standards - - - Workers' Rights
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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