Optimal Contracts with Randomly Arriving Tasks

• Authors: Alexander Frug.
• BSE Working Paper: 110620 | January 20
• Keywords: dynamic contracting , seniority , random tasks , promotion
• JEL codes: D86, M51
• dynamic contracting
• seniority
• random tasks
• promotion

Workers rarely perform exactly the same tasks every day. Instead, their daily workload may change randomly over time to comply with the fluctuating needs of the organization where they are employed. In this paper, we show that this typical randomness in workplaces has a striking effect on the structure of long-term employment contracts. In particular, simple intertemporal variability in the worker’s tasks is sufficient to generate a rich promotion-based dynamics in which, occasionally, the worker receives a (permanent) wage raise and his future work requirements are reduced.