We explain why organizations that limit the voice of their agents can benefit from granting them an exit option. We study a hierarchy with a principal, a productive supervisor and an agent. Communication is imperfect in that only the supervisor can communicate with the principal, while the agent...

Real world contracts limit the liabilities of agents by imposing constraints on their transfers or on their utilities. In an adverse selection model, Sappington (1983) has shown that the two constraints yield an equivalent problem for the principal. We show that this result does not hold in a...