Incentive Contracts for Teams: Experimental Evidence

69 Pages Posted: 29 May 2014 Last revised: 10 Sep 2015

See all articles by Claudia M. Landeo

Claudia M. Landeo

University of Alberta - Department of Economics

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Date Written: August 25, 2015

Abstract

This paper reports the results of an experiment on incentive contracts for teams. The agents, whose efforts are complementary, are rewarded according to a sharing rule chosen by the principal. Depending on the sharing rule, the agents confront endogenous prisoner's dilemma or stag-hunt environments. Our main findings are as follows. First, we demonstrate that ongoing interaction among team members positively affects the principal's payoff. Greater team cooperation is successfully induced with less generous sharing rules in infinitely-repeated environments. Second, we provide evidence of the positive effects of communication on team cooperation in the absence of ongoing team interaction. Fostering communication among team members does not significantly affect the principal's payoff, suggesting that agents' communication is an imperfect substitute for ongoing team interaction. Third, we show that offering low sharing rules can backfire. The agents are willing to engage in costly punishment (shirking) as retaliation for low offers from the principal. Our findings suggest that offering low sharing rules is perceived by the agents as unkind behavior and hence, triggers negative reciprocity.

Keywords: Teams, Effort Complementarity, Principal -- Multi-Agent Framework, Moral Hazard in Teams, Team Cooperation, Prisoner's Dilemma, Stag-Hunt Games, Infinitely-Repeated Games, Communication, Reciprocity, Experiments

JEL Classification: C72, C90, D86, K10, L23

Suggested Citation

Landeo, Claudia M. and Spier, Kathryn E., Incentive Contracts for Teams: Experimental Evidence (August 25, 2015). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2443216 or http://dx.doi.org/10.2139/ssrn.2443216

Claudia M. Landeo (Contact Author)

University of Alberta - Department of Economics ( email )

Henry Marshall Tory Building 7-25
Edmonton, Alberta T6G 2H4
Canada

HOME PAGE: http://sites.google.com/a/ualberta.ca/claudia-m-landeo-s-home-page/home

Kathryn E. Spier

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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