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Teams and Tournaments in Relational Contracts

Kvaløy, Ola; Olsen, Trond E.
Working paper
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URI
http://hdl.handle.net/11250/227208
Date
2013-12
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  • Discussion papers (FOR) [531]
Abstract
This paper analyses and compares optimal relational contracts be-

tween a principal/firm and a set of agents when (a) only aggregate out-

put can be observed, and (b) individual outputs can be observed. We

show that the optimal contract under (a) is a team incentive scheme

where each agent is paid a maximal bonus for aggregate output above

a threshold and a minimal (no) bonus otherwise. The team's effi-

ciency decreases with its size (number of agents) when outputs are

non-negatively correlated, but may increase considerably with size if

outputs are negatively correlated. In the case where individual output

can be observed, we show that the optimal contract is a tournament

scheme where the conditions for an agent to obtain the (single) bonus

are stricter for negatively compared to positively correlated outputs.

We finally show that if agents have bargaining power, firms may delib-

erately choose to organize production as a team where only aggregate

output is observable. The team alternative is more likely to be supe-

rior under negatively correlated outputs.
Publisher
FOR
Series
Discussion paper;13/13

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