Outside opportunities and termination

• 成果类型: Article
• 署名作者: Wang, Cheng; Yang, Youzhi
• 署名单位: Fudan University; Iowa State University; Shanghai University of Finance & Economics; Shanghai University of Finance & Economics
• 刊物名称: GAMES AND ECONOMIC BEHAVIOR
• ISSN/ISSBN: 0899-8256
• DOI: 10.1016/j.geb.2015.03.001
• 发表日期: 2015
• 页码: 207-228
• 关键词: Optimal contracting; Outside opportunities; termination; Severance compensation

摘要

We study a dynamic principal agent relationship where a stochastic outside opportunity (offer) arises each period for the risk averse agent. Termination is costly, but it allows the agent to pursue the available outside opportunity and the principal to return to an external market to hire a new agent. The principal acts strategically with respect to the agent's outside offers and we show that it is optimal to terminate the current relationship if and only if the agent's outside offer is above a cutoff level. The optimal contract generates both voluntary and involuntary terminations. Severance compensation arises endogenously and we show that it may be paid only in involuntary terminations. Conditional on termination, the size of the optimal severance compensation depends positively on the agent's current compensation, but negatively on his outside offer. The optimal contract dictates an inverted-U relationship between compensation and the probability of termination. (C) 2015 Elsevier Inc. All rights reserved.