Optimal Team Incentives with CES Production

Abstract:     
Standard economic theory and intuition suggests that the free rider problem will overwhelm firm-wide incentives in large firms. Despite this, such schemes are relatively common in manufacturing firms and may be more popular in larger firms. This paper models an optimal incentive contract and a simple partnership with CES production functions. The results suggest that when employee inputs are complements, firm-wide incentives such as profit sharing and partnerships are quite valuable, even in large firms.

Keywords: Incentives, teams, profit sharing

JEL Classifications: J33, L22, M52

Working Paper Series