Should They Compete or Should They Cooperate? The View of Agency Theory

What is the most efficient way of designing incentives for a group of agents? Over the past five decades, agency theory has provided various answers to this crucial question. This line of research has argued that, depending on the specific organizational context, the best channel for providing incentives involves either relying on collective compen-sations or, on the contrary, employing relative performance evaluations. In the first scenario, cooperation among agents is the key aspect of the organization. In the second, competition among agents prevails. This paper provides a comprehensive overview of this extensive literature, with the aim of understanding the conditions under which one or the other type of incentive scheme is more desirable for the principal of the organiza-tion. To achieve this, we use a flexible workhorse model that is capable of addressing a wide range of scenarios characterized by different technologies, information constraints, and behavioral norms.