CIRJE-F-825 "A Dynamic Multitask Model: Fixed Wages, No Externalities, and Holdup Problems"
Author Name Adachi-Sato, Meg and Kazuya Kamiya
Date November 2011
Full Paper   PDF file
Remarks   Revised in January 2012 and October 2013.

This article develops a multitask model in which the agent has to produce both verifiable and unverifiable outputs in a dynamic framework as observed in actual labor markets and practices. The model derives an important result regarding the timing and the length of a wage contract. A short-term wage contract allows for greater holdup, but it motivates the agent to engage in a task whose output is unverifiable. In contrast, a long-term wage contract does not allow for holdup and induces the first-best level effort for verifiable outputs, but it removes the incentive for unverifiable outputs. By studying an optimal wage profile and finding the optimal timing to sign a contract in a multitask framework, our model explains why individuals paid fixed wages have more frequent opportunities for wage negotiation compared with those paid through incentive pay. Furthermore, our model predicts that in industries where unverifiable outputs are valued, wage contracts are renewed more frequently.