Self-respecting worker in the precarious gig economy: A dynamic principal-agent model
We develop a continuous-time principal-agent model of gig work, where contractual flexibility allows the employer to adjust fixed pay and output-based incentives dynamically. The worker's participation depends on a backward-looking reference value--an exponentially weighted average of net payoff from past employment--capturing a self-respect--driven wage demand. If an offer's expected utility falls short of the reference value, the worker rejects the contract, resulting in temporary unemployment. Accepted contracts transmit output volatility to the worker through a sensitivity parameter, inducing instability into earnings and employment. The employer's optimal threshold policies strategically use this volatility transfer to regulate the worker's wage demands. In the first-best case, the principal imposes maximal volatility to drive the reference value down to its minimum, after which volatility transfer ceases entirely. In the second-best case, the need to incentivize effort ensures ongoing volatility transfer. Stationary analysis predicts a humped-shaped relationship between worker sensitivity and the principal's profit. If sensitivity is too low, the worker's wage demands are overly rigid and difficult to regulate, while if it is too high, their demands become excessively volatile, which eventually erodes the principal's control.