On Multiagent Moral Hazard under Technological Uncertainty

This paper reexamines the issue of competitive versus collective incentives in a multiagent moral hazard framework. A detailed analysis of imperfect knowledge on the technology - or uncertainty - is the key to new results. The baseline fact is that under complementarity the optimal scheme is collective, while it is competitive under substitutability. As a consequence, the widespread idea that a principal should use all the more competitive scheme that the equilibrium outcomes are more correlated is shown not to hold under risk-neutrality. This is so because equilibrium correlation levels increasing with effort create a form of informational complementarities, and therefore pleads for cooperative schemes. When the agents are risk-averse, that informational effect has to be traded off against the agents' insurance concerns. The optimal scheme is then either competitive or mixed, a novelty in the contracting literature. Mixed schemes can be interpreted as the use of aggregate profit sharing in combination with selective firing or promotion.