Contracts with interdependent preferences

Debraj Ray and Marek Weretka

No 92, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: This paper studies contracting between a principal and 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 playoffs. 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 teas linked via adversarial rather than altruistic preferences.

Keywords: interdependent payoffs; joint liability; tournaments (search for similar items in EconPapers)
JEL-codes: C72 D64 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2023
New Economics Papers: this item is included in nep-des and nep-mic
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Related works:
Working Paper: Contracts with Interdependent Preferences (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fme:wpaper:92

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