Controlling Scarce Working Time in a Multi-task Incentive Problem

Abstract

Even though working time is one of the firm's scarcest resources, there are very few insights into how to optimally control it. In this paper we analyze the optimal allocation of scarce working time to two tasks in a contracting problem. Since each hour devoted to one specific task is not available for the other task, and vice versa, the agent accounts for opportunity cost when allocating his time to the tasks. We analyze this trade-off assuming that the agent's contribution is not contractible, such that a contract must be written based on an alternative measure. Time scarcity restricts total output. At the same time, however, it changes the agent's focus of attention towards the task with the higher performance sensitivity. Thus, by increasing the incentive coefficient the principal induces the agent to shift time from the less sensitive to the more sensitive task. The main contribution of our paper is that we show that time scarcity can improve the congruence of the agent's behavior with the principal's objectives. Under certain conditions an improved alignment of effort under time scarcity offsets the reduction of output and increases the agency's surplus.