Abstract

http://ssrn.com/abstract=944744
 
 

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Optimal Multi-Agent Performance Measures for Team Contracts


Jaeyoung Sung


Ajou University

Hyeng Keun Koo


Ajou University - Department of Business Administration

Gyoocheol Shim


Bank of Korea

November 14, 2006


Abstract:     
We present a continuous-time contracting model under moral hazard with many agents. The principal contracts many agents as a team, and they jointly produce correlated outcomes. We show the optimal contract for each agent is linear in outcomes of all other agents as well as his/her own. The structure of the optimal contract strikingly reveals that the optimal aggregate performance measure in general can be orthogonally decomposed into two statistics: one is a sufficient statistic, and the other a non-sufficient statistic. As a consequence, the optimal aggregate performance measure in general is not a sufficient statistic, except when the principal is risk neutral. We further discuss agents' optimal effort choices using a "quadratic-cost" example, which also strikingly suggests that team contracts sometimes provide lower-powered effort incentives than individually separate contracts do.

Number of Pages in PDF File: 22

Keywords: principal-agent problem, many agents, moral hazard, team, performance measure, contracts, continuous-time model, martingale method

JEL Classification: C61, C73, D86, G30, L14, L25

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Date posted: November 14, 2006  

Suggested Citation

Sung, Jaeyoung and Koo, Hyeng Keun and Shim, Gyoocheol, Optimal Multi-Agent Performance Measures for Team Contracts (November 14, 2006). Available at SSRN: http://ssrn.com/abstract=944744 or http://dx.doi.org/10.2139/ssrn.944744

Contact Information

Jaeyoung Sung (Contact Author)
Ajou University ( email )
Woncheon-dong, Yeongtong-gu
Suwon-si, Gyeonggi-do
Korea, Republic of (South Korea)
Hyeng Keun Koo
Ajou University - Department of Business Administration ( email )
206 Worldcup-ro
Yeongtong-gu
Suwon, 443-749
Korea, Republic of (South Korea)
Gyoocheol Shim
Bank of Korea ( email )
110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794, 100-794
Korea, Republic of (South Korea)
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