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Optimal self-enforcement and termination

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  • Wang, Cheng
  • Yang, Youzhi

Abstract

We study a principal-agent problem where the agent receives a stochastic outside opportunity (offer) each period, and he cannot commit to the ongoing contractual relationship. Termination, which is costly, allows the principal to go back to an external market to hire a new agent. The principal responds strategically to the agent’s outside offers, choosing optimally between retaining the agent, which must be self-enforced, and terminating him, which then ends the current contract. The model generates both voluntary and involuntary terminations, and dynamics and stationarity outcomes that are of interest especially for understanding employment relationships with on-the-job search.

Suggested Citation

  • Wang, Cheng & Yang, Youzhi, 2019. "Optimal self-enforcement and termination," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 161-186.
    • Handle: RePEc:eee:dyncon:v:101:y:2019:i:c:p:161-186
    DOI: 10.1016/j.jedc.2018.12.010
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    Cited by:

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