Team Incentives in Relational Employment Contracts

32 Pages Posted: 18 Jun 2005

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)

Date Written: June 2005

Abstract

The paper analyzes conditions for implementing incentive schemes based on, respectively joint, relative and indendent performance, in a relational contract between a principal and a team of two agents. A main result is that the optimal incentive regime depends on the productivity of the agents, or more preciseley on the returns from high effort. This occurs because agents' productivites affect the principal's temptation to renege on the relational contract. The analysis suggests that we will see a higher frequency of relative performance evaluation (RPE) - and schemes that lie close to independent performance evaluation - as we move from low-productive to high-productive environments. In particular, it is shown that if effort-productivity is sufficently high, the optimal scheme for the principal is (for a range of discount factors) a collusion-proof RPE scheme, even if there is no common shock that affects the agents' output.

Keywords: Team Incentives, Relational Contracts, Relative Performance Evaluation

JEL Classification: C72, D82, J33, L14

Suggested Citation

Kvaloy, Ola and Olsen, Trond E., Team Incentives in Relational Employment Contracts (June 2005). Available at SSRN: https://ssrn.com/abstract=744045 or http://dx.doi.org/10.2139/ssrn.744045

Ola Kvaloy (Contact Author)

University of Stavanger ( email )

N-4036 Stavanger
Norway

Trond E. Olsen

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

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