Optimal incentive contracts with job destruction risk

Abstract

We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the firm and the agent. Arrival of the job-destruction shock is always bad news for the firm but can be good news for the agent. In particular, under weak conditions, the optimal contract has exactly two regions. If the agent's continuation value is below a threshold, the agent's continuation value experiences a negative jump upon arrival of the job-destruction shock. If the agent's value is above this threshold, however, the jump in the agent's continuation value is positive, i.e., the agent gets rewarded when the match becomes unproductive. This pattern of adjustment of the agent's value at job destruction allows the firm to reduce the costs of effort incentives while the match is productive. In particular, it allows the firm to adjust the drift of the agent's continuation value process so as to decrease the risk of reaching either of the two inefficient agent retirement points. Further, we study the sensitivity of the optimal contract to the arrival rate of job destruction.

Real Estate Commissions and Homebuying

“…In our analysis, we assume buyer agent commission rate B is exogenously given, and we do not take a stand on the exact reason why the prevailing rate is at 3%. 10…”

“…In our quantitative exercises, we consider both cases where S = 3% or S = 1%, and the welfare …ndings are similar. 10 It is possible that 3% is a focal point established by historical reasons for real estate agents to collude, or it is the constrained pro…t-maximizing rate above which customers may switch to alternative home search and matching options. Our analysis is consistent with either explanation.…”

“…These parameter values are chosen intuitively, and we will then conduct robustness checks. 1, we …rst use condition (10) to solve the lower bound z = $100; 229; above which buyer agents make a positive pro…t. For any house type z z, our model calibration yields the following quantitative …ndings: Using Eq.…”

“…Grochulski and Wang, 2023), we explore those issues more explicitly. The reason real estate agents can command a higher-than-cost commission rate is related to the speci…c…”

Approach of scaling the level of government intervention in the financial market

“…In the financial market a great attention to the theory of market failures has been received after 2008's economic and financial crisis (e.g. Besley, 2010;Allen & Carletti, 2013;Grochulski & Morrison, 2014). Special attention received necessity for the macroprudential regulation as systemic risks were identified on top of financial risks faced by individual companies (Allen & Carletti, 2013;Grochulski & Morrison, 2014).…”