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Robust Incentives for Teams

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  • Tianjiao Dai
  • Juuso Toikka

Abstract

We show that demanding team incentives to be robust to nonquantifiable uncertainty about the game played by the agents leads to contracts that align the agents' interests. Such contracts have a natural interpretation as team‐based compensation. Under budget balance they reduce to linear contracts, thus identifying profit‐sharing, or equity, as an optimal contract absent a sink or a source of funds. A linear contract also gives the best profit guarantee to an outside residual claimant. These contracts still suffer from the free‐rider problem, but a positive guarantee obtains if and only if the technology known to the contract designer is sufficiently productive.

Suggested Citation

  • Tianjiao Dai & Juuso Toikka, 2022. "Robust Incentives for Teams," Econometrica, Econometric Society, vol. 90(4), pages 1583-1613, July.
    • Handle: RePEc:wly:emetrp:v:90:y:2022:i:4:p:1583-1613
    DOI: 10.3982/ECTA16280
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    References listed on IDEAS

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    7. Abreu, Dilip & Matsushima, Hitoshi, 1992. "A Response [Virtual Implementation in Iteratively Undominated Strategies I: Complete Information]," Econometrica, Econometric Society, vol. 60(6), pages 1439-1442, November.
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    Cited by:

    1. Rosenthal, Maxwell, 2023. "Robust incentives for risk," Journal of Mathematical Economics, Elsevier, vol. 109(C).
    2. Bo Peng & Zhihao Gavin Tang, 2024. "Optimal Robust Contract Design," Papers 2406.11528, arXiv.org.
    3. Heijmans, Roweno J.R.K., 2023. "Unraveling Coordination Problems," Discussion Papers 2023/20, Norwegian School of Economics, Department of Business and Management Science.

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