Optimal Contracts for Teams: A Note

Thomas D Vander Veen

International Economic Review, 1995, vol. 36, issue 4, 1051-56

Abstract: In a team subject to adverse selection and moral hazard, R. P. McAfee and J. MacMillan (1991) found, surprisingly, that, under certain conditions, the outcome is unaffected whether the principal observes only total output or whether the principal can observe each person's individual contribution to the production of the output. This leads McAfee and MacMillan to conclude that the purpose of monitoring is to discipline the monitor. However, when team members are risk averse, the principal can benefit by monitoring. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1995
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