Contracting with private rewards
Kirkegaard thanks the Canada Research Chairs programme and SSHRC for funding this research. He is grateful to the Editor, David Martimort, as well as two anonymous referees for substantial and constructive comments that greatly improved the article. He is also grateful for comments and suggestions from seminar audiences at Queen's University, the University of Guelph, and the Canadian Economic Theory Conference.
Abstract
The canonical moral hazard model is extended to allow the agent to face endogenous and noncontractible uncertainty. The agent works for the principal and simultaneously pursues outside rewards. The contract offered by the principal thus manipulates the agent's work–life balance. The participation constraint is slack whenever it is optimal to distort the agent's work–life balance away from life compared to a symmetric-information benchmark. Then, the agent's expected utility is high and he faces flatter incentives. Such contracts may be optimal when the two activities are strong substitutes in the agent's cost function or when reservation utility is low.
