We study a combinatorial variant of the classical principal-agent model. In our setting a principal wishes to incentivize a team of strategic agents to exert costly effort on his behalf. Agentsʼ actions are hidden and the principal observes only the outcome of the team, which depends stochastically on the complex combinations of the efforts by the agents. The principal seeks the mechanism that maximizes the principalʼs net revenue given an equilibrium behavior of the agents. We investigate the structure of the optimal mechanism for various production technologies as the principalʼs value from the project varies. In doing so we quantify the gap between the first-best and second-best solutions. Our results highlight the qualitative and quantitative differences between production technologies that exhibit complementarities and substitutabilities between the agentsʼ actions. In comparing the first best with the second best we highlight the role of effort monitoring by the principal. As we shall see, the benefit from monitoring crucially depends on the underlying technology, with the two polar cases being perfect substitution and perfect complementarity.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eyal Winter, 2003.
"Incentives and Discrimination,"
Discussion Paper Series
dp313, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
- Bengt Holmstrom, 1982.
"Moral Hazard in Teams,"
Bell Journal of Economics,
The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
- Che,Y.K. & Yoo,S.W., 1998.
"Optimal incentives for teams,"
8, Wisconsin Madison - Social Systems.
- Strausz, Roland, 1999. "Efficiency in Sequential Partnerships," Journal of Economic Theory, Elsevier, vol. 85(1), pages 140-156, March.
- Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
- Segal, Ilya, 2003. "Coordination and discrimination in contracting with externalities: divide and conquer?," Journal of Economic Theory, Elsevier, vol. 113(2), pages 147-181, December.
- Eyal Winter, 2010. "Transparency and incentives among peers," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 504-523.
- Smorodinsky, Rann & Tennenholtz, Moshe, 2006. "Overcoming free riding in multi-party computations--The anonymous case," Games and Economic Behavior, Elsevier, vol. 55(2), pages 385-406, May.
When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:147:y:2012:i:3:p:999-1034. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.