Contracts with Interdependent Preferences

Debraj Ray and Marek Weretka

No 32290, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A principal contracts with multiple agents, as in Lazear and Rosen (1981) and Green and Stokey (1983). The setup is classical except for the assumption that agents have interdependent preferences. We characterize cost effective contracts, and relate the direction of co-movement in rewards — “joint liability” (positive) or “tournaments” (negative) — to the assumed structure of preference interdependence. We also study the implications of preference interdependence for the principal’s payoffs. We identify two asymmetries. First, the optimal contract leans towards joint liability rather than tournaments, especially in larger teams, in a sense made precise in the paper. Second, when the mechanism-design problem is augmented by robustness constraints designed to eliminate multiple equilibria, the principal may prefer teams linked via adversarial rather than altruistic preferences.

JEL-codes: D21 D90 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-cta and nep-mic
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Working Paper: Contracts with interdependent preferences (2023)
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