Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/149246
Authors: 
Englmaier, Florian
Fahn, Matthias
Schwarz, Marco A.
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 6159
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.
Subjects: 
employment relations
dynamic contracting
present bias
JEL: 
D03
D21
J31
M52
Document Type: 
Working Paper

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