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Contracting with Synergies


Alex Edmans


London Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Itay Goldstein


University of Pennsylvania - The Wharton School - Finance Department

John Zhu


University of Pennsylvania, The Wharton School, Finance Department

June 14, 2013

ECGI - Finance Working Paper No. 320/2011

Abstract:     
This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies they exert on others. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries.

Number of Pages in PDF File: 48

Keywords: contract theory, complementarities, principal-agent problem, multiple agents, teams, synergies, influence

JEL Classification: D86, J31, J33

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Date posted: November 13, 2011 ; Last revised: June 14, 2013

Suggested Citation

Edmans, Alex, Goldstein, Itay and Zhu, John, Contracting with Synergies (June 14, 2013). ECGI - Finance Working Paper No. 320/2011. Available at SSRN: http://ssrn.com/abstract=1958708 or http://dx.doi.org/10.2139/ssrn.1958708

Contact Information

Alex Edmans (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
University of Pennsylvania - The Wharton School ( email )
3733 Spruce Street
Philadelphia, PA 19104-6374
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Itay Goldstein
University of Pennsylvania - The Wharton School - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

John Zhu
University of Pennsylvania, The Wharton School, Finance Department ( email )
3620 Locust Walk
Philadelphia, PA 19104
United States

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