DP15567 The Right to Quit Work: An Efficiency Rationale for Restricting the Freedom of Contract

Author(s): Daniel Müller, Patrick W. Schmitz
Publication Date: December 2020
Keyword(s): efficiency wages, Incentive theory, Labor contracts, law and economics, moral hazard
JEL(s): D23, D86, J83, K12, K31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15567

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.