Citation

Discussion Paper Details

Please find the details for DP7914 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

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

Author(s): Florian Englmaier, Gerd Muehlheusser and Andreas Roider

Publication Date: July 2010

Keyword(s): ex-post outside option, limited commitment, limited liability and moral hazard

Programme Area(s): Industrial Organization

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7914

Bibliographic Reference

Englmaier, F, Muehlheusser, G and Roider, A. 2010. 'Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7914