Teams and Tournaments in Relational Contracts

50 Pages Posted: 3 Jun 2014

See all articles by Ola Kvaloy

Ola Kvaloy

University of Stavanger

Trond E. Olsen

Norwegian School of Economics (NHH) - Department of Business and Management Science; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2014

Abstract

We analyze relational contracts for a set of agents when either (a) only aggregate output or (b) individual outputs are observable. A team incentive scheme, where each agent is paid a bonus for aggregate output above a threshold, is optimal in case (a). The team’s efficiency may increase considerably with size if outputs are negatively correlated. Under (b) a tournament scheme with a threshold is optimal, where the threshold, for correlated outputs, depends on an agent’s relative performance. The two cases reveal that it may be optimal to organize production as a team where only aggregate output is observable.

Keywords: relational contracts, teams, tournaments

JEL Classification: D89, J29, L23, M52

Suggested Citation

Kvaloy, Ola and Olsen, Trond E., Teams and Tournaments in Relational Contracts (May 3, 2014). CESifo Working Paper Series No. 4783, Available at SSRN: https://ssrn.com/abstract=2445349 or http://dx.doi.org/10.2139/ssrn.2445349

Ola Kvaloy

University of Stavanger ( email )

N-4036 Stavanger
Norway

Trond E. Olsen (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 55 95 99 76 (Phone)
+47 55 95 96 50 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

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