When an employee announces his intention to quit an existing job, he has an increased incentive to “shirk” work on his last (or next-to-last) day. What is this an example of?
The correct answer and explanation is:
This is an example of “shirking” due to moral hazard in labor economics.
Explanation:
When an employee announces their intention to quit a job, their motivation to perform their work may decrease because they no longer have any long-term incentives to do so. This behavior is a form of moral hazard, where one party takes risks or engages in unproductive behavior because they no longer bear the full consequences of their actions. In this case, the employee may feel that since they are leaving, the negative consequences of not working hard will fall on the employer, who will have to deal with the remaining workload or costs of poor performance.
Moral hazard occurs when an individual or organization has an incentive to take on more risk because the negative outcomes of those risks will not be fully felt by them. For example, in the case of the quitting employee, the employer may not be able to hold them accountable for slack behavior during the final days. The employee knows they are leaving soon, so they are less motivated to put in effort or meet work expectations, since they won’t experience the long-term impact of their actions.
This phenomenon is particularly relevant in situations where contracts or work incentives are not structured to account for short-term behavior. If an employee feels they have little to lose by underperforming, they may take advantage of the situation. It also highlights the importance of good management practices, such as designing incentives that align employee interests with company goals, ensuring accountability, and addressing potential moral hazards before they occur. Employers may try to mitigate such issues by reducing the degree of separation between when an employee quits and when their responsibilities are formally concluded, or by providing end-of-contract incentives to encourage continued effort.