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We introduce a dynamic principal-agent model to understand the nature ofcontracts between an employer and an independent gig worker. We model theworker's self-respect with an endogenous backward-looking participationconstraint; he accepts a job offer if and only if its utility is at least aslarge as his reference value, which is based on the average of previouslyrealized wages. If the dynamically changing reference value capturing theworker's demand is too high, then no contract is struck until the referencevalue hits a threshold. Below the threshold, contracts are offered andaccepted, and the worker's wage demand follows a stochastic process. We applyour model to perfectly competitive and monopsonistic labor market structuresand investigate first-best and second-best solutions. We show that afar-sighted employer with market power may sacrifice instantaneous profit toregulate the agent's demand. Moreover, the far-sighted employer implementsincreasing and path-dependent effort levels. Our model captures the worker'sbargaining power by a vulnerability parameter that measures the rate at whichhis wage demand decreases when unemployed. With a low vulnerability parameter,the worker can afford to go unemployed and need not take a job at all costs.Conversely, a worker with high vulnerability can be exploited by the employer,and in this case our model also exhibits self-exploitation.

Self-respecting worker in the precarious gig economy: A dynamic principal-agent model