Contracting with Synergies
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 320/2011
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
55 Pages Posted: 13 Nov 2011 Last revised: 11 Aug 2020
There are 4 versions of this paper
Contracting with Synergies
Contracting with Synergies
Date Written: November 7, 2013
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 his colleagues exert on each other. 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.
Keywords: contract theory, complementarities, principal-agent problem, multiple agents, teams, synergies, influence
JEL Classification: D86, J31, J33
Suggested Citation: Suggested Citation
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