We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In...

We study optimal incentives in a principal-agent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's...

In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is...

In this paper, we study the conditions under which termination is a useful incentive device in the canonical dynamic principal-agent moral hazard model of Sannikov (2008). We find that temporary suspension of the agent after poor performance dominates termination if the principal's outside...