Contracting With Synergies
This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies his colleagues exert on each other. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries.
|Date of creation:||Jul 2013|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bebchuk, Lucian A. & Cremers, K.J. Martijn & Peyer, Urs C., 2011. "The CEO pay slice," Journal of Financial Economics, Elsevier, vol. 102(1), pages 199-221, October.
- Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-68, June.
- Oyer, Paul & Schaefer, Scott, 2005.
"Why do some firms give stock options to all employees?: An empirical examination of alternative theories,"
Journal of Financial Economics,
Elsevier, vol. 76(1), pages 99-133, April.
- Oyer, Paul & Schaefer, Scott, 2004. "Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories," Research Papers 1772r, Stanford University, Graduate School of Business.
- Paul Oyer & Scott Schaefer, 2004. "Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories," NBER Working Papers 10222, National Bureau of Economic Research, Inc.
- Bergman, Nittai K. & Jenter, Dirk, 2007.
"Employee sentiment and stock option compensation,"
Journal of Financial Economics,
Elsevier, vol. 84(3), pages 667-712, June.
- Edward P. Lazear & Sherwin Rosen, 1979.
"Rank-Order Tournaments as Optimum Labor Contracts,"
NBER Working Papers
0401, National Bureau of Economic Research, Inc.
- Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
- Viral V. Acharya & Stewart C. Myers & Raghuram G. Rajan, 2011.
"The Internal Governance of Firms,"
Journal of Finance,
American Finance Association, vol. 66(3), pages 689-720, 06.
- Acharya, Viral V & Myers, Stewart C & Rajan, Raghuram G, 2009. "The Internal Governance of Firms," CEPR Discussion Papers 7210, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Stewart C. Myers & Raghuram Rajan, 2009. "The Internal Governance of Firms," NBER Working Papers 15568, National Bureau of Economic Research, Inc.
- Ramakrishnan, Ram T S & Thakor, Anjan V, 1991. "Cooperation versus Competition in Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 248-83, Fall.
- JÃ³zsef SÃ¡kovics & Jakub Steiner, 2012.
"Who Matters in Coordination Problems?,"
American Economic Review,
American Economic Association, vol. 102(7), pages 3439-61, December.
- Jozsef Sakovics & Jakub Steiner, 2009. "Who Matters in Coordination Problems?," ESE Discussion Papers 190, Edinburgh School of Economics, University of Edinburgh.
- Steiner, Jakub & Sakovics, Jozsef, 2008. "Who Matters in Coordination Problems?," SIRE Discussion Papers 2008-27, Scottish Institute for Research in Economics (SIRE).
- Kandel, Eugene & Lazear, Edward P, 1992.
"Peer Pressure and Partnerships,"
Journal of Political Economy,
University of Chicago Press, vol. 100(4), pages 801-17, August.
- Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
- repec:rje:randje:v:37:y:2006:2:p:376-390 is not listed on IDEAS
- Bengt Holmstrom, 1982.
"Moral Hazard in Teams,"
Bell Journal of Economics,
The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
- Wouter Dessein & Luis Garicano & Robert Gertner, 2010.
"Organizing for Synergies,"
American Economic Journal: Microeconomics,
American Economic Association, vol. 2(4), pages 77-114, November.
- Armin Falk & Andrea Ichino, 2004.
"Clean Evidence on Peer Effects,"
666156000000000439, UCLA Department of Economics.
- Eyal Winter, 2006. "Optimal incentives for sequential production processes," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 376-390, 06.
- Simon Gervais & Itay Goldstein, 2007. "The Positive Effects of Biased Self-Perceptions in Firms," Review of Finance, European Finance Association, vol. 11(3), pages 453-496.
- Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
- Xavier Gabaix & Augustin Landier, 2006.
"Why Has CEO Pay Increased So Much?,"
2006 Meeting Papers
518, Society for Economic Dynamics.
- Alex Edmans & Xavier Gabaix & Augustin Landier, 2009. "A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4881-4917, December.
- Jayant R. Kale & Ebru Reis & Anand Venkateswaran, 2009. "Rank-Order Tournaments and Incentive Alignment: The Effect on Firm Performance," Journal of Finance, American Finance Association, vol. 64(3), pages 1479-1512, 06.
- Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-36, May.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9559. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.