Contracting With Synergies
This paper studies optimal contracting under synergies. We define influence as the extent to which effort by one agent reduces a colleague's marginal cost of effort, and synergy to be the sum of the (unidimensional) influence parameters across a pair of agents. In a two-agent model, effort levels are equal even if influence is asymmetric. The optimal effort level depends only on total synergy and not individual influence parameters. An increase in synergy raises total effort and total pay, consistent with strong equity incentives in small firms, including among low-level employees. The influence parameters matter only for individual pay. Pay is asymmetric, with the more influential agent being paid more, even though the level and productivity of effort are both symmetric. With three agents, effort levels differ and are higher for more synergistic agents. An increase in the synergy between two agents can lead to the third agent being excluded from the team, even if his productivity is unchanged. This has implications for optimal team composition and firm boundaries. Agents that influence a greater number of colleagues receive higher wages, consistent with the salary differential between CEOs and divisional managers.
|Date of creation:||Nov 2011|
|Date of revision:|
|Note:||CF LE LS|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
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.:
- Eyal Winter, 2006. "Optimal incentives for sequential production processes," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 376-390, 06.
- Steiner, Jakub & Sakovics, Jozsef, 2008.
"Who Matters in Coordination Problems?,"
SIRE Discussion Papers
2008-27, Scottish Institute for Research in Economics (SIRE).
- Wouter Dessein & Luis Garicano & Robert Gertner, 2010.
"Organizing for Synergies,"
American Economic Journal: Microeconomics,
American Economic Association, vol. 2(4), pages 77-114, November.
- 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.
- repec:rje:randje:v:37:y:2006:2:p:376-390 is not listed on IDEAS
- Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-36, May.
- 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.
- 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.
- 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.
- 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.
- 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.
- Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
- Nittai K. Bergman & Dirk Jenter, 2005.
"Employee Sentiment and Stock Option Compensation,"
NBER Working Papers
11409, National Bureau of Economic Research, Inc.
- Xavier Gabaix & Augustin Landier, 2006.
"Why Has CEO Pay Increased So Much?,"
2006 Meeting Papers
518, Society for Economic Dynamics.
- Bengt Holmstrom, 1981.
"Moral Hazard in Teams,"
471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Armin Falk & Andrea Ichino, 2006.
"Clean Evidence on Peer Effects,"
Journal of Labor Economics,
University of Chicago Press, vol. 24(1), pages 39-58, January.
- 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.
- Kandel, E. & Lazear, E.P., 1990.
"Peer Pressure and Partnerships,"
90-07, Rochester, Business - Managerial Economics Research Center.
- Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
- 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.
- 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, MIT Press, vol. 114(2), pages 337-388, May.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:17606. 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.