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The principal’s dilemma

Author

Listed:
  • LOPEZ-PINTADO, Duna
  • MORENO-TERNERO, Juan D.

Abstract

A recurrent dilemma in team management is to select between a team-based and an individual based wage scheme. We explore such a dilemma in a simple model of production in teams, in which the team members may differ in their effort choices and qualification. We show that, in spite of enhancing output as the basis for payment, a team-based wage scheme might be less profitable for the principal than an individual-based wage scheme. We also highlight a deep misalignment between designing optimal (output-based) incentives for a team and treating its members impartially. Finally, upon introducing the possibility of liquidity constraints in our model, we provide rationale for the so-called "rich get richer" hypothesis.

Suggested Citation

  • LOPEZ-PINTADO, Duna & MORENO-TERNERO, Juan D., 2009. "The principal’s dilemma," CORE Discussion Papers 2009003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2009003
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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2009_3.pdf
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    Cited by:

    1. Dunia López-Pintado & Juan D. Moreno-Ternero, 2011. "On the optimal management of teams under budget constraints," Working Papers 11.11, Universidad Pablo de Olavide, Department of Economics.

    More about this item

    Keywords

    team production; management; incentives; effort;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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