Working Paper: CEPR ID: DP7914
Authors: Florian Englmaier; Gerd Muehlheusser; Andreas Roider
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.
Keywords: ex-post outside option; limited commitment; limited liability; moral hazard
JEL Codes: D82; D86; K31; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agent's effort (L85) | principal's expected surplus (G19) |
| contract structure (L14) | agent's behavior (L85) |
| agent's effort (L85) | outside option (C79) |
| agent's effort (L85) | contract terms (K12) |
| contract parameters (D44) | agent's effort (L85) |