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Repeated Moral Hazard with Worker Mobility via Directed On-the-Job Search

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  • Kunio Tsuyuhara

    (University of Toronto)

Abstract

I develop a model of dynamic employment contracts by integrating an optimal contracting problem into an equilibrium search framework. The proposed framework enables us to analyze the interaction between the contracting problem and the endogenously evolving outside environment via worker mobility, and I characterize the optimal long-term wage contract as well as the optimal incentive compatible effort-tenure profile. The optimal contract exhibits an increasing wage-tenure profile for two reasons: 1) it induces the workers to be more likely to stay in their current contracts, and 2) it can induce the workers to make efforts when the current up-front wages cannot. The optimal incentive-compatible effort also has an increasing profile due to an interaction between 1) the workers' fear of losing their jobs, and 2) their incentive to obtain better outside offers. I then show the existence of an equilibrium. The equilibrium inherits the ``block recursivity'' developed by Shi (2008) and Menzio and Shi (2008); that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers.

Suggested Citation

  • Kunio Tsuyuhara, 2009. "Repeated Moral Hazard with Worker Mobility via Directed On-the-Job Search," 2009 Meeting Papers 512, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:512
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    References listed on IDEAS

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    1. Ken Burdett & Melvyn Coles, 2003. "Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 71(5), pages 1377-1404, September.
    2. Shouyong Shi, 2009. "Directed Search for Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 77(2), pages 561-584, March.
    3. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
    4. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
    5. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    6. Shouyong Shi & Guido Menzio, 2008. "A Tractable Model of Search on the Job and Aggregate Fluctuations," 2008 Meeting Papers 248, Society for Economic Dynamics.
    7. Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
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    Cited by:

    1. Gabaix, Xavier & Edmans, Alex, 2010. "Risk and the CEO Market: Why Do Some Large Firms Hire Highly-Paid, Low-Talent CEOs?," CEPR Discussion Papers 7836, C.E.P.R. Discussion Papers.

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