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Optimal Contracts for Teams

Listed author(s):
  • 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. 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.
  2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
  3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  4. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  5. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
  6. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-631, July.
  7. Picard Pierre & Rey Patrick, 1987. "Incentives in cooperative research and development," CEPREMAP Working Papers (Couverture Orange) 8739, CEPREMAP.
  8. repec:hoo:wpaper:e-89-27 is not listed on IDEAS
  9. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
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