Robust Incentives for Teams

Tianjiao Dai and Juuso Toikka

Econometrica, 2022, vol. 90, issue 4, 1583-1613

Abstract: We show that demanding team incentives to be robust to nonquantifiable uncertainty about the game played by the agents leads to contracts that align the agents' interests. Such contracts have a natural interpretation as team‐based compensation. Under budget balance they reduce to linear contracts, thus identifying profit‐sharing, or equity, as an optimal contract absent a sink or a source of funds. A linear contract also gives the best profit guarantee to an outside residual claimant. These contracts still suffer from the free‐rider problem, but a positive guarantee obtains if and only if the technology known to the contract designer is sufficiently productive.

Date: 2022
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