Flexible Contracts

This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. Delegation grants some flexibility in the choice of the action by the agent, but also requires the use of an appropriate incentive contract so as to realign his interests with those of the principal. The parties’ understanding of the possible circumstances in which actions will have to be chosen and their attitude towards risk and uncertainty play then an important role in determining the costs of delegation. The main focus of the paper lies indeed in the analysis of these costs and the consequences for whether or not delegation is optimal. We determine and characterize the properties of the optimal flexible contract both when the parties have sharp probabilistic beliefs over the possible events in which the agent will have to act and when they only have a set of such beliefs. We show that the higher the agent’s degree of risk aversion, the higher the agency costs for delegation and hence the less profitable is a flexible contract versus a rigid one. The agent’s imprecision aversion in the case of multiple priors introduces another, additional agency costs; it again implies that the higher the degree of imprecision aversion the less profitable flexible contracts versus rigid ones. Even though, with multiple priors, the contract may be designed in such a way that principal and agent end up using ’different beliefs’ and hence engage in speculative trade, this is never optimal, in contrast with the case where the parties have sharp heterogeneous beliefs.Delegation, Flexibility, Agency Costs, Multiple Priors, Imprecision Aversion

Flexible Contracts

This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. Delegation grants some flexibility in the choice of the action by the agent, but also requires the use of an appropriate incentive contract so as to realign his interests with those of the principal. The parties’ understanding of the possible circumstances in which actions will have to be chosen and their attitude towards risk and uncertainty play then an important role in determining the costs of delegation. The main focus of the paper lies indeed in the analysis of these costs and the consequences for whether or not delegation is optimal.We determine and characterize the properties of the optimal flexible contract both when the parties have sharp probabilistic beliefs over the possible events in which the agent will have to act and when they only have a set of such beliefs. We show that the higher the agent’s degree of risk aversion, the higher the agency costs for delegation and hence the less profitable is a flexible contract versus a rigid one. The agent’s imprecision aversion in the case of multiple priors introduces another, additional agency costs; it again implies that the higher the degree of imprecision aversion the less profitable flexible contracts versus rigid ones. Even though, with multiple priors, the contract may be designed in such a way that principal and agent end up using ’different beliefs’ and hence engage in speculative trade, this is never optimal, in contrast with the case where the parties have sharp heterogeneous beliefs.delegation, flexibility, agency costs, multiple priors, imprecision aversion

Flexible contracts

This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agents's degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties to not have sharp probability beliefs, the agent's degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts.Delegation ; flexibility ; agency costs ; multiple priors ; imprecision aversion

Flexible contracts

This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. Delegation grants some flexibility in the choice of the action by the agent, but also requires the use of an appropriate incentive contract so as to realign his interests with those of the principal. The parties' understanding of the possible circumstances in which actions will have to be chosen and their attitude towards risk and uncertainty play then an important role in determining the costs of delegation. The main focus of the paper lies indeed in the analysis of these costs and the consequences for whether or not delegation is optimal. We determine and characterize the properties of the optimal flexible contract both when the parties have sharp probabilistic beliefs over the possible events in which the agent will have to act and when they only have a set of such beliefs. We show that the higher the agent's degree of risk aversion, the higher the agency costs for delegation and hence the less profitable is a flexible contract versus a rigid one. The agent's imprecision aversion in the case of multiple priors introduces another, additional agency costs; it again implies that the higher the degree of imprecision aversion the less profitable flexible contracts versus rigid ones. Even though, with multiple priors, the contract may be designed in such a way that principal and agent end up using 'different beliefs' and hence engage in speculative trade, this is never optimal, in contrast with the case where the parties have sharp heterogeneous beliefs.Delegation; Flexibility; Agency Costs; Multiple Priors; Imprecision Aversion

Are flexible contracts bad for workers? Evidence from job satisfaction data

If workers can choose between permanent and flexible contracts, compensating wage differentials should arise to equalize on-the-job utility in the two types of contracts. Estimating job satisfaction using the British Household Panel Survey shows that agency and casual contracts are associated with routinely lower satisfaction. This results because the low job satisfaction associated with less job security is not offset by higher compensation or other job characteristics. Job security is sufficiently important that holding constant this one facet of satisfaction eliminates the overall gap in job satisfaction between flexible and permanent contracts

A note on fixed and flexible-term contracts

Engel et al. (1997 2001 2007) have proposed flexible-term contracts as a solution to suboptimal renegotiation of public-private partnerships. We show that whenever the uncertainty lasts over more than two periods, flexible-term contracts have a drawback. The expected duration of a flexible-term contract can be higher than the (certain) duration of a fixed-term contract, the difference being directly proportional to the volatility of the project

Flexible contract workers in inferior jobs: reappraising the evidence

There has been concern that the increase in non-standard or flexible employment contracts witnessed in many OECD economies is evidence of a growth in low-pay, low-quality jobs. In practice, however, it is difficult to evaluate the `quality' of flexible jobs. Previous research has either investigated objective measures of job quality such as wages and training or subjective measures such as job satisfaction. In this paper, we seek to jointly evaluate objective and subjective elements of flexible employment contracts. Specifically we develop and use an index of job quality that incorporates both subjective and objective elements. Analysis of this index demonstrates that flexible jobs are of a lower quality. However, this approach suggests that analysis of, for instance, job satisfaction alone overstates the negative impact of flexible contracts on workers.

Are flexible contracts bad for workers? Evidence from job satisfaction data

If workers can choose between permanent and flexible contracts, compensating wage differentials should arise to equalize on-the-job utility in the two types of contracts. Estimating job satisfaction using the British Household Panel Survey shows that agency and casual contracts are associated with routinely lower satisfaction. This results because the low job satisfaction associated with less job security is not offset by higher compensation or other job characteristics. Job security is sufficiently important that holding constant this one facet of satisfaction eliminates the overall gap in job satisfaction between flexible and permanent contracts.

A note on fixed and flexible-term contracts

Engel et al. (1997 2001 2007) have proposed flexible-term contracts as a solution to suboptimal renegotiation of public-private partnerships. We show that whenever the uncertainty lasts over more than two periods, flexible-term contracts have a drawback. The expected duration of a flexible-term contract can be higher than the (certain) duration of a fixed-term contract, the difference being directly proportional to the volatility of the project.public-private partnerships

Flexible contracts and human capital investments

As suggested by human capital theory, workers with flexible contracts participate lessoften in training than those with permanent contracts. We find that this is merely dueto the fact that flexworkers receive less employer–funded training, a gap they can onlypartly compensate for by their own training investments. Flexworkers particularlyparticipate less in firm–specific training that is meant to keep up with new skilldemands than workers with permanent contracts. However, for those who participatein employer–funded firm–specific training, a temporary contract appears to facilitatethe transition to a permanent contract with the same employer. However, this doesnot hold for participation in self–paid training. This training, which is usually generaltraining, does not help in finding a better job.education, training and the labour market;