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Team Incentives in Relational Employment Contracts

  • 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)

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.

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File URL: http://hdl.handle.net/11250/163570
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2005/7.

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Length: 33 pages
Date of creation: 12 Oct 2005
Date of revision:
Handle: RePEc:hhs:nhhfms:2005_007
Contact details of provider: Postal:
NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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