Team Incentives and Reference‐Dependent Preferences

Kohei Daido and Takeshi Murooka

Journal of Economics & Management Strategy, 2016, vol. 25, issue 4, 958-989

Abstract: We investigate a multi‐agent moral‐hazard model where agents have expectation‐based reference‐dependent preferences à la Kőszegi and Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, a principal may employ team incentives. Because the agents are loss averse, they have first‐order risk aversion to wage uncertainty. This causes the agents to work harder when their own failure is stochastically compensated through other agents' performance. In the optimal contract, agents with high performance are always rewarded, whereas agents with low performance are rewarded if and only if other agents' performance is high.

Date: 2016
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Citations: View citations in EconPapers (10)

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https://doi.org/10.1111/jems.12166

Related works:
Working Paper: Team Incentives and Reference-Dependent Preferences (2016)
Working Paper: Team Incentives and Reference-Dependent Preferences (2011)
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