Logo Logo
Help
Contact
Switch Language to German
Englmaier, Florian; Fahn, Matthias; Schwarz, Marco A. (2017): Long-Term Employment Relations when Agents Are Present Biased. Collaborative Research Center Transregio 190, Discussion Paper No. 6
[img]
Preview
667kB

Abstract

We analyze how agents' present bias affects optimal contracting in an infinite-horizon employment setting. The principal maximizes profits by offering a menu of contracts to naive agents: a virtual contract - which agents plan to choose in the future - and a real contract which they end up choosing. This virtual contract motivates the agent and allows the principal to keep the agent below his outside option. Moreover, under limited liability, implemented effort can be inefficiently high. With a finite time horizon, the degree of exploitation of agents decreases over the life-cycle. While the baseline model abstracts from moral hazard, we show that the result persists also when allowing for non-contractible effort.