Universität zu Köln

Olcay, Nadide Banu (2016). Dynamic incentive contracts with termination threats. Rev. Econ. Des., 20 (4). S. 255 - 289. HEIDELBERG: SPRINGER HEIDELBERG. ISSN 1434-4750

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Abstract

We consider a dynamic moral hazard model where the principal offers a series of short-run contracts. We study the optimal mix of two alternative instruments for incentive provision: a performance based wage (a carrot) and a termination threat (a stick). At any given point in time, these instruments are substitutes in the provision of incentives. We are particularly interested in the dynamic interaction of these two instruments. Both carrot and stick are used more intensively as the agent approaches the end of his finite life. The sharing of the surplus of the relationship plays a key role: a termination threat is included in the optimal contract if and only if the agent's expected future gain from the relationship is sufficiently high, compared to the principal's expected future gain. Also, a termination threat is more likely to be optimal if output depends more on luck than on effort, if the discount factor is high, or if the agent's productivity is low. The model, provided that the optimal contract includes a termination threat, essentially provides an alternative explanation for upward-sloping wage profiles even in the absence of full-commitment.

Item Type:	Journal Article
Creators:	Creators Email ORCID ORCID Put Code Olcay, Nadide Banu UNSPECIFIED UNSPECIFIED UNSPECIFIED
URN:	urn:nbn:de:hbz:38-255221
DOI:	10.1007/s10058-016-0192-2
Journal or Publication Title:	Rev. Econ. Des.
Volume:	20
Number:	4
Page Range:	S. 255 - 289
Date:	2016
Publisher:	SPRINGER HEIDELBERG
Place of Publication:	HEIDELBERG
ISSN:	1434-4750
Language:	English
Faculty:	Unspecified
Divisions:	Unspecified
Subjects:	no entry
Uncontrolled Keywords:	Keywords Language PRINCIPAL-AGENT PROBLEM; REPEATED MORAL HAZARD; CEO TURNOVER; INVOLUNTARY UNEMPLOYMENT; MANDATORY RETIREMENT; CAREER CONCERNS; TIME; INFORMATION; COMMITMENT; LINEARITY Multiple languages Economics Multiple languages
Refereed:	Yes
URI:	http://kups.ub.uni-koeln.de/id/eprint/25522