RIEB Discussion Paper Series No.2022-23

Title

A Long-term Contract with a Possibility of Dismissal for a Multitasking Agent

Abstract

This article develops a multitask agency model in which the agent has to make investments for producing both contractible output and noncontractible intermediate input in a dynamic framework when the principal can fire the agent in the long-term wage contract. The model predicts that if the diversion cost for the principal is suffciently small, the principal prefers the long-term wage contract without firing rather than the short-term wage contract or the long-term wage contract with firing. However, if the diversion cost for the principal becomes larger, the principal may be more likely to prefer the short-term wage contract or the long-term wage contract with firing. Furthermore, if the agent's bargaining power increases, the more likely the long-term wage contracts are chosen.

Keywords

Fixed pay; Incentive pay; Dismissal wage contracts

JEL Classification

D86, J41, J31

Note

This discussion paper is a work-in-progress.

Inquiries

Meg ADACHI-SATO
Junior Research Fellow, Research Institute for Economics & Business Administration, Kobe University
Faculty of Business Administration and Accountancy, Khon Kaen University
E-mail: megasato@diamond.kobe-u.ac.jp.