Incentive Contracts and Peer Effects in the Workplace

Marc Claveria-Mayol and Pau Milán

No 1439, Working Papers from Barcelona School of Economics

Abstract: We study the problem of a principal designing wage contracts that simultaneously incentivize and insure workers. Workers’ incentives are connected through chains of productivity spillovers, represented by a network of peer-effects. We solve for the optimal linear contract for any network and show that optimal incentives are steeper for more central workers. We link firm profits to organizations’ structure via the spectral properties of the co-worker network. When production is modular, the incentive allocation rule is sensitive to the link structure across and within modules. When firms can’t write personalized con- tracts, better connected workers extract rents and total surplus is reduced. In this case, unemployment emerges endogenously because large within-group differences in centrality can decrease firm’s profits.

Keywords: contracts; Networks; moral hazard; Incentives; Organizations (search for similar items in EconPapers)
JEL-codes: D21 D23 D85 D86 L14 L22 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm, nep-mic, nep-net and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1439

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