Moral Hazard In Teams With Limited Punishments And Multiple Outputs
AbstractThis paper studies incentive provision with limited punishments. It revisits the moral hazard problem with risk neutral parties and solves for optimal compensation schemes in situations where agents' participation is implied by a limited liability constraint. Providing minimum cost incentives to teams or individuals requires awarding high bonuses only when extreme performances are observed. Even when the first-best is attainable, the principal may prefer to induce more (or less) effort than it is sociably desirable because she only cares about the marginal cost of motivation. With positive production externalities joint bonuses are optimal. With limited liability on the principal's side, the optimal scheme becomes a tournament---even in the absence of externalities. The paper also looks at conditions that favor one incentive scheme over another when agents adapt their strategies as information becomes available.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb040705.
Date of creation: Jan 2004
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-08 (All new papers)
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