Incentives in optimally sized teams for projects with uncertain returns

Oliver Dürr, Markus Nisch and Anna Rohlfing-Bastian ()
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Oliver Dürr: University of Applied Sciences Esslingen
Markus Nisch: Goethe University Frankfurt
Anna Rohlfing-Bastian: Goethe University Frankfurt

Review of Accounting Studies, 2020, vol. 25, issue 1, No 9, 313-341

Abstract: Abstract This paper analyzes a principal-agent model with three risk-averse players to investigate incentive provision and optimal team size in a setting with uncertain productivity and team synergies. A principal hires a team of workers and a manager to supervise the team. Workers provide productive effort, whereas the manager exerts effort to reduce measurement noise and productivity risk. We find that moral hazard is a limiting factor for team size and that the risk from uncertain productivity leads to smaller optimal teams, which stands in contrast to previous literature. Furthermore, we show that the manager’s and workers’ compensation increases with team size and that the pay differential between them is higher for larger teams. Our analysis demonstrates that the interdependency between team size and incentive provision makes it essential to coordinate the choice of these design variables.

Keywords: Incentive contracts; Uncertainty; Team size; Monitoring (search for similar items in EconPapers)
JEL-codes: D82 M41 M52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11142-019-09529-5

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