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Team Incentives in Relational Employment Contracts

Author

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  • Kvaløy, Ola

    () (Norsk hotellhøgskole, Institutt for økonomi og ledelse, University of Stavanger)

  • Olsen, Trond E.

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

The paper analyzes conditions for implementing incentive schemes based on, respectively joint, relative and independent performance, in a relational contract between a principal and a team of two agents. A main result is that the optimal incentive regime depends on the productivity of the agents, or more precisely on the returns from high effort. This occurs because agents’ productivities affect the principal’s temptation to renege on the relational contract. The analysis suggests that we will see a higher frequency of relative performance evaluation (RPE) - and schemes that lie close to independent performance evaluation - as we move from low-productive to high-productive environments. In particular, it is shown that if effort-productivity is sufficiently high, the optimal scheme for the principal is (for a range of discount factors) a collusion-proof RPE scheme, even if there is no common shock that affects the agents’ output.

Suggested Citation

  • Kvaløy, Ola & Olsen, Trond E., 2005. "Team Incentives in Relational Employment Contracts," Discussion Papers 2005/7, Norwegian School of Economics, Department of Business and Management Science.
  • Handle: RePEc:hhs:nhhfms:2005_007
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    File URL: http://hdl.handle.net/11250/163570
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    Cited by:

    1. Sloof, Randolph & Sonnemans, Joep, 2011. "The interaction between explicit and relational incentives: An experiment," Games and Economic Behavior, Elsevier, vol. 73(2), pages 573-594.
    2. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.
    3. David A. Miller & Kareen Rozen, 2011. "Optimally Empty Promises and Endogenous Supervision," Cowles Foundation Discussion Papers 1823, Cowles Foundation for Research in Economics, Yale University, revised Jun 2012.
    4. Ishida, Junichiro, 2009. "Incentives in academics: Collaboration under weak complementarities," Labour Economics, Elsevier, vol. 16(2), pages 215-223, April.
    5. Gershkov, Alex & Li, Jianpei & Schweinzer, Paul, 2016. "How to share it out: The value of information in teams," Journal of Economic Theory, Elsevier, vol. 162(C), pages 261-304.
    6. Jenny Kragl & Julia Schmid, 2009. "The Impact of Envy on Relational Employment Contracts," Post-Print hal-00723632, HAL.
    7. Gill, David & Stone, Rebecca, 2015. "Desert and inequity aversion in teams," Journal of Public Economics, Elsevier, vol. 123(C), pages 42-54.
    8. Chao, Hong & Croson, Rachel T.A., 2013. "An experimental comparison of incentive contracts in partnerships," Journal of Economic Psychology, Elsevier, vol. 34(C), pages 78-87.
    9. Joyee Deb & Jin Li & Arijit Mukherjee, 2015. "Relational Contracts with Subjective Peer Evaluations," Cowles Foundation Discussion Papers 1995, Cowles Foundation for Research in Economics, Yale University.
    10. Kragl, Jenny & Schmid, Julia, 2009. "The impact of envy on relational employment contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 766-779, November.
    11. Ola Kvaløy & Trond E. Olsen, 2012. "The Rise of Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 493-518, June.
    12. Kvaløy, Ola & Olsen, Trond E., 2013. "Teams and Tournaments in Relational Contracts," Discussion Papers 2013/13, Norwegian School of Economics, Department of Business and Management Science.
    13. Ola Kvaløy & Trond E. Olsen, 2008. "Relative Performance Evaluation, Agent Hold-up and Firm Organization," NBER Chapters,in: Organizational Innovation and Firm Performance, pages 229-241 National Bureau of Economic Research, Inc.
    14. Kvaløy, Ola & Olsen, Trond E., 2016. "Teams in Relational Contracts," Discussion Papers 2016/23, Norwegian School of Economics, Department of Business and Management Science.
    15. Dijkstra, Bouwe R. & Rübbelke, Dirk T.G., 2013. "Group rewards and individual sanctions in environmental policy," Resource and Energy Economics, Elsevier, vol. 35(1), pages 38-59.
    16. Arijit Mukherjee & Luis Vasconcelos, 2011. "Optimal job design in the presence of implicit contracts," RAND Journal of Economics, RAND Corporation, vol. 42(1), pages 44-69, March.
    17. Bäker, Agnes & Mertins, Vanessa, 2013. "Risk-sorting and preference for team piece rates," Journal of Economic Psychology, Elsevier, vol. 34(C), pages 285-300.
    18. repec:bla:jemstr:v:25:y:2016:i:4:p:958-989 is not listed on IDEAS
    19. Jianpei Li, 2009. "Team production with inequity-averse agents," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 8(2), pages 119-136, August.
    20. William Gilje Gjedrem & Ola Kvaløy, 2018. "Relative Performance Feedback to Teams," CESifo Working Paper Series 6871, CESifo Group Munich.
    21. James M. Malcomson, 2012. "Relational Incentive Contracts," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
    22. Shingo Ishiguro & Yosuke Yasuda, 2018. "Moral Hazard and Target Budgets," Discussion Papers in Economics and Business 18-03, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    23. David A. Miller & Joel Watson, 2013. "A Theory of Disagreement in Repeated Games With Bargaining," Econometrica, Econometric Society, vol. 81(6), pages 2303-2350, November.
    24. Nick Vikander, 2009. "The Breakdown of Morale," Tinbergen Institute Discussion Papers 09-027/1, Tinbergen Institute.
    25. Kohei Daido & Takeshi Murooka, 2016. "Team Incentives and Reference-Dependent Preferences," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 958-989, December.

    More about this item

    Keywords

    Incentive schemes; joint performance; relative and independent performance; relational contracts;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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