Teams and Tournaments in Relational Contracts
50 Pages Posted: 3 Jun 2014
There are 2 versions of this paper
Teams and Tournaments in Relational Contracts
Teams and Tournaments in Relational Contracts
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: Suggested Citation