The Right to Quit Work: An Efficiency Rationale for Restricting the Freedom of Contract

Müller, Daniel and Schmitz, Patrick W. (2021): The Right to Quit Work: An Efficiency Rationale for Restricting the Freedom of Contract. Published in: Journal of Economic Behavior and Organization , Vol. 184, (2021): pp. 653-669.

Abstract

A principal hires an agent to provide a verifiable service. Initially, the agent can exert unobservable effort to reduce his disutility from providing the service. If the agent is free to waive his right to quit, he may voluntarily sign a contract specifying an inefficiently large service level, while there are insufficient incentives to exert effort. If the agent's right to quit is inalienable, the underprovision of effort may be further aggravated, but the service level is ex post efficient. Overall, it turns out that the total surplus can be larger when agents are not permitted to contractually waive their right to quit work. Yet, we also study an extension of our model in which even the agent can be strictly better off when the parties have the contractual freedom to waive the agent's right to quit.

• Item Type: MPRA Paper
• Language: English
• Keywords: Moral hazard; Incentive theory; Labor contracts; Efficiency wages; Law and economics
• Subjects: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; J - Labor and Demographic Economics > J8 - Labor Standards: National and International > J83 - Workers' Rights; K - Law and Economics > K1 - Basic Areas of Law > K12 - Contract Law; K - Law and Economics > K3 - Other Substantive Areas of Law > K31 - Labor Law; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M5 - Personnel Economics > M55 - Labor Contracting Devices

References

Aghion, P., Hermalin, B., 1990. Legal restrictions on private contracts can enhance efficiency. Journal of Law, Economics, and Organization 6, 381--409.

Altan, B., 2019. Dynamic moral hazard with sequential tasks. Economics Letters 183, 108606.

At, C., Friehe, T., Gabuthy, Y., 2019. On lawyer compensation when appeals are possible. BE Journal of Economic Analysis and Policy 19, 1--11.

Au, P.H., Chen, B.R., 2019. Objective and subjective indicators in long-term contracting. Journal of Economic Behavior and Organization 166, 309--331.

Axelson, U., Bond, P., 2015. Wall street occupations. Journal of Finance 70, 1949--1996.

Baliga, S., Sjöström, T., 1998. Decentralization and collusion. Journal of Economic Theory 83, 196--232.

Basu, K., 2003. The economics and law of sexual harassment in the workplace. Journal of Economic Perspectives 17, 141--157.

Bernstein, D.E., 2003. Lochner's legacy's legacy. Texas Law Review 82, 1--71.

Bolton, P., Dewatripont, M., 2005. Contract Theory. MIT Press.

Brandwein, P., 2017. The labor vision of the Thirteenth Amendment, revisited. Georgetown Journal of Law and Public Policy 15, 13--58.

Buechel, B., Feess, E., Muehlheusser, G., 2020. Optimal law enforcement with sophisticated and naïve offenders. Journal of Economic Behavior and Organization 177, 836--857.

Cato, S., Ishihara, A., 2017. Transparency and performance evaluation in sequential agency. Journal of Law, Economics, and Organization 33, 475--506.

Coase, R.H., 1960. The problem of social cost. Journal of Law and Economics 3, 1--44.

Davis, K.E., 2006. The demand for immutable contracts: Another look at the law and economics of contracts modifications. New York University Law Review 81, 487--549.

Englmaier, F., Muehlheusser, G., Roider, A., 2014. Optimal incentive contracts for knowledge workers. European Economic Review 67, 82--106.

Fudenberg, D., Rayo, L., 2019. Training and effort dynamics in apprenticeship. American Economic Review 109, 3780--3812.

Green, B., Taylor, C.R., 2016. Breakthroughs, deadlines, and self-reported progress: Contracting for multistage projects. American Economic Review 106, 3660--3699.

Hart, O.D., 1995. Firms, Contracts and Financial Structure. Oxford University Press.

Hart, O., 2017. Incomplete contracts and control. American Economic Review 107, 1731--52.

Hart, O., Holmström, B., 1987. The theory of contracts. In: Bewley, T. (ed.), Advances in Economics and Econometrics, Econometric Society Monographs, Fifth World Congress. Cambridge University Press, 71--155.

Hart, O., Moore, J., 1999. Foundations of incomplete contracts. Review of Economic Studies 66, 115--138.

Holmström, B., 2017. Pay for performance and beyond. American Economic Review 107, 1753--77.

Hoppe, E.I., Schmitz, P.W., 2021. How (not) to foster innovations in public infrastructure projects. Scandinavian Journal of Economics 123, 238--266.

Innes, R.D., 1990. Limited liability and incentive contracting with ex-ante action choices. Journal of Economic Theory 52, 45--67.

Kim, K., 2015. Beyond coercion. UCLA Law Review 62, 1558--1584.

Köszegi, B., 2014. Behavioral contract theory. Journal of Economic Literature 52, 1075--1118.

Kragl, J., Schöttner, A., 2014. Wage floors, imperfect performance measures, and optimal job design. International Economic Review 55, 525--550.

Kräkel, M., 2016. Human capital investment and work incentives. Journal of Economics and Management Strategy 25, 627--651.

Kräkel, M., Schöttner, A., 2016. Optimal sales force compensation. Journal of Economic Behavior and Organization 126, 179--195.

Kräkel, M., Sliwka, D., 2009. Should you allow your employee to become your competitor? On noncompete agreements in employment contracts. International Economic Review 50, 117--141.

Laffont, J.-J., Martimort, D., 2002. The Theory of Incentives: The Principal-Agent Model. Princeton University Press.

Medema, S.G., 2020. The Coase theorem at sixty. Journal of Economic Literature 58, 1045--1128.

Myerson, R.B., 1982. Optimal coordination mechanisms in generalized principal--agent problems. Journal of Mathematical Economics 10, 67--81.

Ohlendorf, S., Schmitz, P.W., 2012. Repeated moral hazard and contracts with memory: The case of risk-neutrality. International Economic Review 53, 433--452.

Oman, N.B., 2009. Specific performance and the thirteenth amendment. Minnesota Law Review 93, 2020--2099.

Ontiveros, M.L., 2019. "Liquidated Damages" in guest worker contracts: Involuntary servitude, debt peonage or valid contract clause? Nevada Law Journal 19, 413--445.

Pi, J., 2014. Job design with sequential tasks and outcome externalities revisited. Economics Letters 125, 274--277.

Pi, J., 2018. Another look at job design with conflicting tasks. Australian Economic Papers 57, 427--434.

Pitchford, R., 1998. Moral hazard and limited liability: The real effects of contract bargaining. Economics Letters 61, 251--259.

Pope, J.G., 2010. Contract, race, and freedom of labor in the constitutional law of "involuntary servitude". Yale Law Journal 119, 1474--1567.

Rapp, G.C., 2005. Affirmative injunctions in athletic employment contracts: Rethinking the place of the Lumley rule in American sports law. Marquette Sports Law Review 16, 261--285.

Schmitz, P.W., 2004. Job protection laws and agency problems under asymmetric information. European Economic Review 48, 1027--1046.

Schmitz, P.W., 2005a. Allocating control in agency problems with limited liability and sequential hidden actions. Rand Journal of Economics 36, 318--337.

Schmitz, P.W., 2005b. Should contractual clauses that forbid renegotiation always be enforced? Journal of Law, Economics, and Organization 21, 315--329.

Schmitz, P.W., 2005c. Workplace surveillance, privacy protection, and efficiency wages. Labour Economics 12, 727--738.

Schmitz, P.W., 2006. Information gathering, transaction costs, and the property rights approach. American Economic Review 96, 422--434.

Schöttner, A., 2017. Optimal sales force compensation in dynamic settings: Commissions vs. bonuses. Management Science 63, 1529--1544.

Shavell, S., 2006. Specific performance versus damages for breach of contract: An economic analysis. Texas Law Review 84, 831--876.

Singh, R., 2016. Ronald Coase on firms and externalities. Working Paper, Delhi School of Economics.

Soifer, A., 2012. Federal protection, paternalism, and the virtually forgotten prohibition of voluntary peonage. Columbia Law Review 112, 1607--1640.

Spier, K.E., Whinston, M.D., 1995. On the efficiency of privately stipulated damages for breach of contract: Entry barriers, reliance, and renegotiation. Rand Journal of Economics 26, 180--202.

Sunstein, C.R., 1987. Lochner's legacy. Columbia Law Review 87, 873--919.

Talley, E.L., 1994. Contract renegotiation, mechanism design, and the liquidated damages rule. Stanford Law Review 46, 1195--1243.

Tamada, Y., Tsai, T.S., 2014. Delegating the decision-making authority to terminate a sequential project. Journal of Economic Behavior and Organization 99, 178--194.

Tirole, J., 1999. Incomplete contracts: Where do we stand? Econometrica 67, 741--781.

VanderVelde, L.S., 1989. Labor vision of the Thirteenth Amendment. University of Pennsylvania Law Review 138, 437--504.

Wonnell, C.T., 1993. The contractual disempowerment of employees. Stanford Law Review 46, 87--146.

Zietlow, R.E., 2010. Free at last -- Anti-subordination and the Thirteenth Amendment. Boston University Law Review 90, 255--312.