Team Incentives in Relational Employment Contracts

Ola Kvaløy and Trond Olsen

No 2005/7, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: The paper analyzes conditions for implementing incentive schemes based on, respectively joint, relative and independent performance, in a relational contract between a principal and a team of two agents. A main result is that the optimal incentive regime depends on the productivity of the agents, or more precisely on the returns from high effort. This occurs because agents’ productivities affect the principal’s temptation to renege on the relational contract. The analysis suggests that we will see a higher frequency of relative performance evaluation (RPE) - and schemes that lie close to independent performance evaluation - as we move from low-productive to high-productive environments. In particular, it is shown that if effort-productivity is sufficiently high, the optimal scheme for the principal is (for a range of discount factors) a collusion-proof RPE scheme, even if there is no common shock that affects the agents’ output.

Keywords: Incentive schemes; joint performance; relative and independent performance; relational contracts (search for similar items in EconPapers)
JEL-codes: J41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2005-10-12
New Economics Papers: this item is included in nep-bec and nep-spo
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Team Incentives in Relational Employment Contracts (2006)
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