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

Author

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  • Englmaier, Florian
  • Muehlheusser, Gerd
  • Roider, Andreas

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.

Suggested Citation

  • Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2010. "Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave," CEPR Discussion Papers 7914, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7914
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    References listed on IDEAS

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    1. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1079-1109.
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    Cited by:

    1. repec:bla:econom:v:84:y:2017:i:335:p:498-515 is not listed on IDEAS
    2. Robert Dur & Jan Tichem, 2012. "Social Relations and Relational Incentives," Tinbergen Institute Discussion Papers 12-054/1, Tinbergen Institute.
    3. Romuald Elie & Dylan Possamai, 2016. "Contracting theory with competitive interacting agents," Papers 1605.08099, arXiv.org.
    4. Bierbrauer, Felix & Netzer, Nick, 2016. "Mechanism design and intentions," Journal of Economic Theory, Elsevier, vol. 163(C), pages 557-603.
    5. repec:eee:indorg:v:52:y:2017:i:c:p:1-29 is not listed on IDEAS
    6. Sarkisian, Roberto, 2017. "Team Incentives under Moral and Altruistic Preferences: Which Team to Choose?," TSE Working Papers 17-838, Toulouse School of Economics (TSE).
    7. repec:eee:eecrev:v:101:y:2018:i:c:p:230-249 is not listed on IDEAS
    8. Luca Livio, 2018. "Friends or Foes? Optimal Incentives for Reciprocal Agents," Working Papers ECARES 2018-03, ULB -- Universite Libre de Bruxelles.
    9. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2014. "Optimal incentive contracts for knowledge workers," European Economic Review, Elsevier, vol. 67(C), pages 82-106.
    10. Ingela Alger & Jörgen W. Weibull, 2017. "Strategic Behavior of Moralists and Altruists," Games, MDPI, Open Access Journal, vol. 8(3), pages 1-21, September.
    11. F. Barigozzi & E. Manna, 2017. "Envy in Mission-Oriented Organizations," Working Papers wp1108, Dipartimento Scienze Economiche, Universita' di Bologna.
    12. Kräkel, Matthias, 2016. "Peer effects and incentives," Games and Economic Behavior, Elsevier, vol. 97(C), pages 120-127.
    13. Chassang, Sylvain & Zehnder, Christian, 2016. "Rewards and punishments: informal contracting through social preferences," Theoretical Economics, Econometric Society, vol. 11(3), September.
    14. Yang, Fanzheng, 2013. "Using laboratory experiments to study otherwise unobservable labor market interactions," ISU General Staff Papers 201301010800004100, Iowa State University, Department of Economics.
    15. Mass, Helene & Fugger, Nicolas & Gretschko, Vitali & Wambach, Achim, 2017. "Imitation perfection: A simple rule to prevent discrimination in procurement," ZEW Discussion Papers 17-058, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    16. Gürtler, Marc & Gürtler, Oliver, 2014. "The interaction of explicit and implicit contracts: A signaling approach," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 135-146.
    17. Fehr, Ernst & Tougareva, Elena & Fischbacher, Urs, 2014. "Do high stakes and competition undermine fair behaviour? Evidence from Russia," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 354-363.
    18. Ostermaier, Andreas, 2016. "Reciprocity and honesty in capital budgeting: Positive spill-over effects of reporting," Annual Conference 2016 (Augsburg): Demographic Change 145904, Verein für Socialpolitik / German Economic Association.
    19. Swapnendu Banerjee & Mainak Sarkar, 2017. "Other-regarding principal and moral hazard: The single-agent case," International Journal of Economic Theory, The International Society for Economic Theory, vol. 13(3), pages 313-326, September.
    20. Cato, Susumu & Ebina, Takeshi, 2014. "Inequality aversion in long-term contracts," MPRA Paper 59893, University Library of Munich, Germany.
    21. Manna, Ester, 2016. "Envy in the workplace," Economics Letters, Elsevier, vol. 142(C), pages 18-21.
    22. repec:gam:jgames:v:8:y:2017:i:3:p:37-:d:110961 is not listed on IDEAS
    23. Biener, Christian & Eling, Martin & Landmann, Andreas & Pradhan, Shailee, 2018. "Can group incentives alleviate moral hazard? The role of pro-social preferences," European Economic Review, Elsevier, vol. 101(C), pages 230-249.
    24. Linde, Jona & Sonnemans, Joep, 2015. "Decisions under risk in a social and individual context: The limits of social preferences?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 56(C), pages 62-71.
    25. Brice Corgnet & Roberto Hernán-González, 2015. "Revisiting the Tradeoff between Risk and Incentives: The Shocking Effect of Random Shocks," Working Papers 15-05, Chapman University, Economic Science Institute.

    More about this item

    Keywords

    ex-post outside option; limited commitment; limited liability; moral hazard;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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