Working Papers

[1] Equilibrium Contracts and Boundedly Rational Expectations, joint with Heidi Christina Thysen

We examine a principal-agent framework in which the agent has a misspecified model of the principal’s project. She fits this model to the objective probability distribution in order to predict outcomes under alternative actions. Under mild restrictions, the agent has correct expectations on the equilibrium path, but may incorrectly extrapolate how off-equilibrium actions map into outcomes. We characterize when the agent’s misspecification relaxes incentive compatibility or even eliminates the incentive problem. Moreover, we study how the principal can organize the workplace to create scope for such misspecifications, e.g., through incomplete contracts, performance evaluation, transparency, and screening. Several results from the literature on contracting with boundedly rational agents can be recovered and extended in our framework.

[2] Measuring Indirect Effects of Unfair Employer Behavior on Worker Productivity – A Field Experiment, joint with Matthias Heinz, Sabrina Jeworrek, Vanessa Mertins and Matthias Sutter, CEPR Discussion Paper 12429 [pdf] [Online Appendix] [voxeu column]

We conduct a field experiment to study how workers’ productivity is affected if employers act unfairly towards their co-workers. Our employees work for two shifts in a call-center. In our main treatment, we lay off some workers before the second shift. Compared to two control treatments, we find that the layoff reduces the productivity of unaffected workers by 12 percent. This result is not driven by peer effects or altered beliefs about the job or the management’s competence, but caused by workers’ perception of unfair employer behavior. The latter interpretation is confirmed in a prediction experiment with professional HR managers. Our results suggest that the price for unfair employer behavior goes well beyond the potential tit-for-tat of directly affected workers.

[3] The Agency Costs of On-the-Job Search, joint with Daniel Herbold [pdf]

This paper studies how workers‘ on-the-job search influences optimal incentives in organizations. We analyze a principal-agent model in which the agent multitasks between working for the principal and searching for other job opportunities. The agent partly uses on-the-job search to improve his bargaining position within the relationship. We show that the optimal contract may feature both excessive (larger than first-best) performance bonuses as well as efficiency wages. Both measures reduce the agent’s search incentives, but do not completely eliminate rent-seeking under the optimal contract. On-the-job search therefore generates agency costs. The model suggests a new rational for excessive incentive pay and efficiency wages.

[4] Relational Retention, joint with Daniel Herbold [pdf]

This paper uses a repeated-game model to study the retention of talented workers in the face of competition for talent. When the job benefits that workers value are non-contractible, retention cannot be achieved by a sequence of spot contracts, but must be based on self-enforcing long-term agreements, which we call relational retention contracts. Retention then is successful only if workers trust their employers‘ promises. We demonstrate that relational contracts are valuable even if there are no incentive problems inside firms, and that firms with a relatively low valuation for talent may be able to retain talented workers. The latter finding generates a rationale for inefficient, but stable assignments of workers to jobs.