|
on Contract Theory and Applications |
| By: | Juan Dubra; Rob Waiser; Jean-Pierre Benoit |
| Abstract: | Employee burnout has long plagued firms. The prevalence of burnout shows that work-related effort is not only costly in the present but has carryover effects into the future. We incorporate this ‘effort cost spillover’ into a dynamic, two- period principal-agent model, where the worker’s effort cost in the second period increases in both their second-period and first-period efforts. We use this model to explore optimal compensation design and the connection between incentives, burnout, and turnover. Naturally, turnover may occur if it is easy to replace workers, or if firms fail to account for burnout when designing contracts. However, we show that even when turnover is very costly, and firms and workers properly understand effort cost spillover, the firm’s equilibrium strategy may be to offer high-powered incentives that induce workers to work so hard that they exit (i.e. reject any contract that the firm would offer) in the next period. Workplace measures that reduce spillover, such as flexible work arrangements, can limit turnover and improve profits dramatically. Committing to contracts for both periods in advance can also limit turnover (at the cost of reduced flexibility). |
| Keywords: | compensation, incentives, dynamic games, burnout, agency theory |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:mnt:wpaper:2512 |
| By: | Yun Gao (Hong Kong Monetary Authority); Kenichi Ueda (The University of Tokyo) |
| Abstract: | We propose a canonical model of loan screening under symmetrically imperfect information. The project quality is unknown to both a lender and a borrower, but it is revealed with noise to the lender with cost. We show that, under meaningful parameter values, there are three types of equilibria: (i) screening and separating equilibrium, (ii) non-screening and pooling equilibrium, and (iii) non-screening and cheap-information-based separating equilibrium. They are all constrained socially optimal. In particular, the screening and separating equilibrium emerges when the average project quality is low or when the interest rate is high. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cfi:fseres:cf614 |
| By: | I. Sebastian Buhai |
| Abstract: | We develop a continuous-time model of reputational disclosure in directed networks of biased intermediaries with career concerns. A payoff-relevant fundamental follows a diffusion and a decision maker chooses actions to track it. Experts obtain verifiable signals that reach the decision maker only if relayed by intermediaries. Intermediaries choose whether to forward evidence and an observable disclosure clock that controls the arrival rate of disclosure opportunities. Because clocks are public, silence is state dependent: when the clock is on, delay is informative and reputationally costly; when it is off, silence is mechanically uninformative. Disclosure becomes a real option on reputational capital. Along any expert-decision maker path, Markov perfect Bayesian equilibria are ladder policies with finitely many posterior cutoffs, and clock-off windows eliminate knife-edge mixing. With sufficiently high reputational stakes and low discounting, dynamic incentives rule out persistent suppression and guarantee eventual transmission of all verifiable evidence along the path, even when bias reversals block static unraveling. We then study network design and formation. Absent the high-reputation regime, among trees exactly the bias-monotone ones sustain disclosure. Under homogeneous reputational intensities the bias-ordered line is dynamically optimal; with heterogeneous intensities, optimal design screens by topology, placing high-reputation intermediaries on direct parallel routes rather than in series. In an endogenous link-formation game, pairwise stable networks can be inefficiently sparse or redundantly dense because agents ignore the option-value externalities their links create or destroy for others' reputational assets. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.22987 |