The Optimal Duration of Contracts

Arbeitspapier

We study the optimal duration of contracts in a principal-agent framework with both moral hazard and adverse selection. Agents decide on a contract-specific and non-verifiable investment. Incentive compatibility requires that initial contracts, which serve to screen the ability of newly hired agents, cannot be longer than continuation contracts, offered to successful agents. Initial contracts remain unpaid unless service quality is unobservable to other agents and the share of high-ability agents is high. Optimal durations depend, in non-monotonic ways, on the principal’s ow valuation of the agent’s service and the share of high-ability agents.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 6808

Classification and Topics

• Classification: Wirtschaft ; Wages, Compensation, and Labor Costs: General ; Transactional Relationships; Contracts and Reputation; Networks ; Labor Contracts ; Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
• Subject: contract length ; term length ; screening

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Poutvaara, Panu ; Takalo, Tuomas ; Wagener, Andreas
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/174931
• Last update: 10.03.2025, 11:43 AM CET