Misaligning Incentives in Teams

In a multi-agent setting, we study the optimal design of monitoring and compensation to uniquely implement work under contracting frictions. Our principal monitors workers flexibly but is constrained in the number of messages she can contract on. With only two messages, the optimal contract features two sub-teams competing for a bonus. Intra-firm competition increases the impact workers have on their remuneration, implying that lower wages suffice to incentivize effort. With more messages, partial misalignment of incentives enables the principal to extract the full surplus from a team whose size grows exponentially with the number of messages.

Keywords: Misaligned incentives, Contracting frictions, Unique implementation, Endogenous monitoring

JEL Classification: D62, D82, D83, D86

Suggested Citation: Suggested Citation

Cusumano, Carlo and Gan, Tan and Pieroth, Ferdinand, Misaligning Incentives in Teams (August 7, 2023). Available at SSRN: https://ssrn.com/abstract=4533867 or http://dx.doi.org/10.2139/ssrn.4533867