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Contracting with Private Rewards

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  • Rene Kirkegaard

    (Department of Economics and Finance, University of Guelph)

Abstract

I extend the canonical moral hazard model to allow the agent to face endogenous and non-contractible uncertainty. The agent works for the principal and simultaneously pursues private rewards. I establish conditions under which the first-order approach remains valid. The model adds to the literature on intrinsic versus extrinsic motivation. Specifically, to induce higher effort at work the contract may offer higher rewards but flatter incentives. The contract change makes the agent reevaluate his “work-life balance†. Larger employment rewards lessens the incentive to pursue private rewards. The greater reliance on labor income then necessitates weaker explicit incentives to induce high effort.

Suggested Citation

  • Rene Kirkegaard, 2015. "Contracting with Private Rewards," Working Papers 1504, University of Guelph, Department of Economics and Finance.
    • Handle: RePEc:gue:guelph:2015-04
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    References listed on IDEAS

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    1. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    2. Ábrahám, Árpád & Koehne, Sebastian & Pavoni, Nicola, 2011. "On the first-order approach in principal-agent models with hidden borrowing and lending," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1331-1361, July.
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    5. René Kirkegaard, 2020. "Contracting with private rewards," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 589-612, June.
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    8. Kirkegaard, René, 2017. "A unifying approach to incentive compatibility in moral hazard problems," Theoretical Economics, Econometric Society, vol. 12(1), January.
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    Cited by:

    1. René Kirkegaard, 2020. "Contracting with private rewards," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 589-612, June.
    2. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.

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    More about this item

    Keywords

    First-Order Approach; Intrinsic Motivation; Moral Hazard; Multi-tasking; Principal-Agent Models; Private Rewards;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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