Teams and Tournaments in Relational Contracts

Ola Kvaløy and Trond Olsen

No 2013/13, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: This paper analyses and compares optimal relational contracts between a principal/firm and a set of agents when (a) only aggregate output can be observed, and (b) individual outputs can be observed. We show that the optimal contract under (a) is a team incentive scheme where each agent is paid a maximal bonus for aggregate output above a threshold and a minimal (no) bonus otherwise. The team’s efficiency decreases with its size (number of agents) when outputs are non-negatively correlated, but may increase considerably with size if outputs are negatively correlated. In the case where individual output can be observed, we show that the optimal contract is a tournament scheme where the conditions for an agent to obtain the (single) bonus are stricter for negatively compared to positively correlated outputs. We finally show that if agents have bargaining power, firms may deliberately choose to organize production as a team where only aggregate output is observable. The team alternative is more likely to be superior under negatively correlated outputs.

Keywords: Relational Contracts; team incentive scheme; tournament (search for similar items in EconPapers)
JEL-codes: D00 D20 D21 D80 D86 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2013-12-30
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
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Related works:
Working Paper: Teams and Tournaments in Relational Contracts (2014)
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