Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 896: The Misaligned Incentives of Temporary Work Agencies and their Client Firms

Morgan Westéus () and Tomas Raattamaa ()
Additional contact information
Morgan Westéus: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden
Tomas Raattamaa: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden

Abstract: This paper adds to the theoretical literature on the incentives of Temporary Work Agencies (TWAs). Using a principal-agent model with hidden action to analyse two main types of contracts between a TWA and a Client Firm (CF), the TWA is shown to potentially act against the best interest of the CF when helping to fill a vacant position. The results also suggest that the adverse effect of the incentive misalignment is larger when workers are leased rather than hired by the CF. However, this effect could potentially be offset by introducing a sufficient level of competition among TWAs.

Keywords: Temporary work agency; client firm; incentives; matching; contracts

JEL-codes: J41; J44; J64

15 pages, November 12, 2014

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