Joint Design of Team Production Technology and Performance Pay

Abstract

A principal incentivizes a team of agents to exert efforts on a project by offering them bonuses upon project success. In addition to bonuses she also designs the project's technology, which maps agents' effort profiles to project success probabilities. Multiple equilibria typically arise due to agents' strategic interactions. Unlike the case where the principal only sets bonuses, I show that it is possible to derive a joint bonus-technology design that is optimal for her for a large class of equilibrium selection criteria/implementation requirements. An implication is that this joint design achieves a good balance between optimality and robustness for her. The corresponding technology exhibits strategic independence among agents' efforts, eliminating their coordination concerns. In addition, I show that any technology exhibiting strategic substitutability among efforts is suboptimal for the principal for all standard implementation requirements.

Keywords: moral hazard in teams, contracting with externalities, technology design, multiple equilibria, implementation requirements, optimality-robustness tradeoff

JEL Classification: D21, D82, D86, L2