Incentivizing Commitment: Balancing Retainers and Market Alternatives in Long-Term Contracts

Abstract

Consider a scenario where an organization hires long-term consultants to perform tasks that are difficult to monitor closely. The only effective disciplinary action available to the employer is to terminate the consultant’s contract. Key details are as follows: 1. The consultant must be hired at a fixed retainer, denoted by rr, paid upfront. 2. The consultant’s alternative opportunity is a temporary project-based role paying $100 per project (ignoring variability in availability and project frequency). 3. The tasks assigned to the consultant are not easily monitored, creating a risk of underperforman