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

  • Englmaier, Florian


    (University of Munich)

  • Muehlheusser, Gerd


    (University of Hamburg)

  • Roider, Andreas


    (University of Regensburg)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5027.

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Length: 53 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5027
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  1. Nick Netzer & Florian Scheuer, 2008. "Competitive Markets without Commitment," SOI - Working Papers 0814, Socioeconomic Institute - University of Zurich.
  2. Matthias Kräkel & Dirk Sliwka, 2006. "Should You Allow Your Agent to Become Your Competitor? -- On Non-Compete Agreements in Employment Contracts," Bonn Econ Discussion Papers bgse4_2006, University of Bonn, Germany.
  3. Anton, James J & Yao, Dennis A, 1995. "Start-ups, Spin-offs, and Internal Projects," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 362-78, October.
  4. Hvide, Hans K. & Kristiansen, Eirik G., 2006. "Management of Knowledge Workers," Discussion Papers 2006/7, Department of Business and Management Science, Norwegian School of Economics.
  5. O'Flaherty, Brendan & Siow, Aloysius, 1995. "Up-or-Out Rules in the Market for Lawyers," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 709-35, October.
  6. Imran Rasul & Silvia Sonderegger, 2008. "The Role of the Agent's Outside Options in Principal-Agent Relationships," Bristol Economics Discussion Papers 08/605, Department of Economics, University of Bristol, UK.
  7. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
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