A Repeated Principal-Agent Model with On-the-Job Search

47 Pages Posted: 13 Aug 2014 Last revised: 19 Nov 2016

See all articles by Daniel Herbold

Daniel Herbold

Goethe University Frankfurt - Department of Management and Microeconomics

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2014

Abstract

This paper analyzes how on-the-job search (OJS) by an agent impacts the moral hazard problem in a repeated principal-agent relationship. OJS is found to constitute a source of agency costs because efficient search incentives require that the agent receives all gains from trade. Further, the optimal incentive contract with OJS matches the design of empirically observed compensation contracts more accurately than models that ignore OJS. In particular, the optimal contract entails excessive performance pay plus efficiency wages. Efficiency wages reduce the opportunity costs of work effort and hence serve as a complement to bonuses. Thus, the model offers a novel explanation for the use of efficiency wages. When allowing for renegotiation, the model generates wage and turnover dynamics that are consistent with empirical evidence. I argue that the model contributes to explaining the concomitant rise in the use of performance pay and in competition for high-skill workers during the last three decades.

Keywords: Repeated Principal-Agent Model, On-the-Job Search, Moral Hazard, Multitasking, Efficiency Wages

JEL Classification: C73, D82, D86, J33, L14

Suggested Citation

Herbold, Daniel, A Repeated Principal-Agent Model with On-the-Job Search (August 1, 2014). SAFE Working Paper No. 64. Available at SSRN: https://ssrn.com/abstract=2479325 or http://dx.doi.org/10.2139/ssrn.2479325

Daniel Herbold (Contact Author)

Goethe University Frankfurt - Department of Management and Microeconomics ( email )

Germany

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