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Incentive Contracts and Peer Effects in the Workplace

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  • Marc Claveria-Mayol
  • Pau Milán

Abstract

We study the problem of a principal designing wage contracts that simultaneously incentivize and insure workers. Workers’ incentives are connected through chains of productivity spillovers, represented by a network of peer-effects. We solve for the optimal linear contract for any network and show that optimal incentives are steeper for more central workers. We link firm profits to organizations’ structure via the spectral properties of the co-worker network. When production is modular, the incentive allocation rule is sensitive to the link structure across and within modules. When firms can’t write personalized con- tracts, better connected workers extract rents and total surplus is reduced. In this case, unemployment emerges endogenously because large within-group differences in centrality can decrease firm’s profits.

Suggested Citation

  • Marc Claveria-Mayol & Pau Milán, 2024. "Incentive Contracts and Peer Effects in the Workplace," Working Papers 1439, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1439
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    References listed on IDEAS

    as
    1. Barton H. Hamilton & Jack A. Nickerson & Hideo Owan, 2003. "Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 465-497, June.
    2. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 917-962.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    contracts; Networks; moral hazard; Incentives; Organizations;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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