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The Optimality of Team Contracts

Author

Listed:
  • Mehmet Barlo

    (FASS, Sabancı University, Tuzla, Istanbul 34956, Turkey)

  • Ayça Özdoğan

    (Department of Economics, TOBB University of Economics and Technology, Sögütözü Cad. No. 43, Sögütözü, Ankara 06560, Turkey)

Abstract

This paper analyzes optimal contracts in a linear hidden-action model with normally distributed returns possessing two moments that are governed jointly by two agents who have negative exponential utilities. They can observe and verify each others’ effort levels and draft enforceable side-contracts on effort levels and realized returns. Standard constraints, resulting in incentive contracts, fail to ensure implementability, and we examine centralized collusion-proof contracts and decentralized team contracts, as well. We prove that the principal may restrict attention to team contracts whenever returns from the project satisfy a mild monotonicity condition.

Suggested Citation

  • Mehmet Barlo & Ayça Özdoğan, 2013. "The Optimality of Team Contracts," Games, MDPI, vol. 4(4), pages 1-20, November.
    • Handle: RePEc:gam:jgames:v:4:y:2013:i:4:p:670-689:d:30528
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    References listed on IDEAS

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    1. Barlo, Mehmet & Özdog˜an, Ayça, 2014. "Optimality of linearity with collusion and renegotiation," Mathematical Social Sciences, Elsevier, vol. 71(C), pages 46-52.

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