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Optimal Contracts for Teams

  • McAfee, R Preston
  • McMillan, John

In a team subject to both adverse selection (each member's ability is known only to himself) and moral hazard (effort cannot be observed), optimal contracts are, under certain conditions, linear in the team's output. The outcome is the same whether the principal observes just the total output or each individual's contribution. Thus, monitoring is not needed to prevent shirking by team members; instead, the role of monitoring is to discipline the monitor. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 32 (1991)
Issue (Month): 3 (August)
Pages: 561-577

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Handle: RePEc:ier:iecrev:v:32:y:1991:i:3:p:561-77
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  1. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  3. Picard Pierre & Rey Patrick, 1987. "Incentives in cooperative research and development," CEPREMAP Working Papers (Couverture Orange) 8739, CEPREMAP.
  4. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
  6. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-631, July.
  8. Mukesh Eswaran & Ashok Kotwal, 1984. "The Moral Hazard of Budget-Breaking," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 578-581, Winter.
  9. repec:hoo:wpaper:e-89-27 is not listed on IDEAS
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