Essay on Contract Structure in Principal-Agent Problems with Behavioral Models

Abstract

Designing employment contracts in a principal-agent relationship is a key problem in the modern firm theory. This dissertation investigates this problem from three different angles, (1) the employment contracts in the labor market with procrastinating workers; (2) the behavior of members and reciprocal leaders in group competitions, where leaders can reward members discretionarily; (3) optimal employment contracts when tasks are endogenously designed.

For the chapter about the employment contracts as a commitment device, I build an adverse selection model in a labor market of one firm against many workers, where the workers, if self-employed, procrastinate due to their own quasi-hyperbolic discounting. In the equilibrium, the model shows that workers with the least procrastination are self-employed and workers with the most procrastination are part-time employees in a separating equilibrium where the workers' hiring contracts differ by their quasi-hyperbolic discounting. In between, there exist specific ranges of quasi-hyperbolic discounting factors, in each of which the workers sign the same contract in a pooling equilibrium. This model leads to a “position hierarchy” within the firm as well as separation of paid-employment and self-employment in the labor market.

For the chapter about the behavior of reciprocal leaders and members in group competitions, I model the model equilibrium when the leaders are reciprocal and show the existence of the pure strategy equilibrium. A laboratory group all-pay auctions was run to test for the model predictions.