Contracting with Synergies
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)
University of Pennsylvania - The Wharton School - Finance Department
University of Pennsylvania, The Wharton School, Finance Department
June 14, 2013
ECGI - Finance Working Paper No. 320/2011
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, J33working papers series
Date posted: November 13, 2011 ; Last revised: June 14, 2013
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