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

49 Pages Posted: 5 Mar 2021

See all articles by Daniel Müller

Daniel Müller

University of Würzburg

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: 2021

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.

Keywords: Moral hazard, Incentive theory, Labor contracts, Efficiency wages, Law and economics

JEL Classification: D23, D86, J83, K12, K31, M55

Suggested Citation

Müller, Daniel and Schmitz, Patrick W., The Right to Quit Work: An Efficiency Rationale for Restricting the Freedom of Contract (2021). Journal of Economic Behavior and Organization, Vol. 184, 653-669, Available at SSRN: https://ssrn.com/abstract=3797770

Daniel Müller

University of Würzburg ( email )

Sanderring 2
Würzburg, 97070
Germany

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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