Nash Contracts with Interdependent Preferences

Marek Weretka and Debraj Ray
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Marek Weretka: University of Wisconsin-Madison
Debraj Ray: University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: A principal contracts with multiple agents, as in Lazear and Rosen (1981) and Green and Stokey (1983). Agents have interdependent preferences, but otherwise the setting is classical. We characterize optimal contracts, and relate the direction of co-movement in rewards — “joint liability” (positive) or “tournaments” (negative) — to the assumed structure of preference interdependence. At the same time, as we range over a symmetric family of positively and negatively interdependent preferences, the corresponding distribution of optimal contracts leans towards commonality in payoffs (e.g., joint liability) rather than differences (e.g., tournaments), in a sense made precise in the paper. This asymmetry is qualified to some degree when the mechanism-design problem is augmented by robustness constraints designed to eliminate multiple equilibria.

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1634

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