Working Paper: CEPR ID: DP15567
Authors: Daniel Müller; Patrick W. Schmitz
Abstract: 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.
Keywords: Moral Hazard; Incentive Theory; Labor Contracts; Efficiency Wages; Law and Economics
JEL Codes: D86; D23; J83; K12; K31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Enforcing quitting rights (J26) | Total surplus (D69) |
| Right to quit not waived (J26) | Total surplus (D69) |
| Contractual freedom preferred by principal (D86) | Quitting rights not waived (J26) |
| Inalienable right to quit preferred by agent (J26) | Quitting rights not waived (J26) |