Success and Payoff Reversals in Dynamic Agency Relationships

Abstract

This paper explores the effects of incentives in a simple dynamic model, where a set of rational agents works on a joint task. We reveal that higher incentives may not only discourage agents' effort provision in earlier periods, but they can also lower the task's success rate and reduce agents' payoffs. These success and payoff reversals arise naturally once agents interact dynamically, i.e., in more than one period. Our novel insights contribute to explaining the prevalent empirical phenomenon of project delays and failures.

Keywords: Agency Model; Incentives; Success Reversals; Payoff Reversals

JEL Classification: C73, D82, D90, J30, M52