Incentives in academics: Collaboration under weak complementarities

This paper considers a contracting relationship with multiple agents in a repeated setting under voluntary team formation. In each period, an opportunity to collaborate arrives stochastically but whether this opportunity has arrived is the agents' private information. The principal thus cannot simply tell them when to collaborate; she must instead guide them through incentives. The optimal contract in the repeated setting can drastically be different from that in the static setting and is often characterized as high-powered team incentives complemented with inefficiently low-powered individual incentives, which endogenously raise the cost of shirking. We then argue that low-powered incentives offered for non-collaborative works, as often observed in our profession, can be seen as an important part of optimal incentive schemes in an attempt to endogenously raise the cost of shirking. The mechanism presented here also has implications for internal team competition (team competition within firms) which has become increasingly popular these days.     

The Rise of Individual Performance Pay

Existing empirical evidence suggests that individual performance pay is more prevalent in human‐capital‐intensive industries. We introduce a model that can contribute to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peer‐dependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold up, the lower is the implementable degree of peer‐dependent incentives. In a setting with complementary tasks, we show that although team‐based incentives are optimal if agents are dispensable, it may be costly, and, in fact, suboptimal, to provide team incentives when the agents become indispensable.     

Peer Evaluation: Incentives and Coworker Relations

In many workplaces, coworkers have the best information about each other's efforts. This paper studies a principal who only observes the joint output by two limitedly liable agents, while agents receive signals about each other's effort levels. The principal attempts to exploit this information through peer evaluation; agents are asked to report their signal and may receive a bonus for being evaluated positively. Lying aversion ascertains that truthful evaluation is possible, while interpersonal relations between colleagues give an incentive to misreport. This paper shows that peer evaluation gives an incentive for effort, even when the evaluations are not truthful. The peer evaluation bonus is constrained by more intensive coworker relations. Still, the optimal contract always includes a peer evaluation bonus, sometimes complemented with a team bonus. Coworker relations have nonmonotonic effects on profits in the optimal contract.     

Implementation and information in teams

A risk-neutral principal hires risk-averse agents to work in a team production process. Each agent can observe the actions taken by some subset of the other agents, and (perhaps) the realization of a random variable which is correlated with output. The principal cannot observe actions or the random variable. However, the agents can communicate with the principal, and final output is verifiable. We characterize the information structures that make it possible for the principal to implement his first best. In general it will be desirable to restrict the information available to the agents. If the first best can be implemented, then it can be implemented by a very simple mechanism, in which each agent forecasts the team output, but sends no other message.     

Team Incentives and Reference‐Dependent Preferences

We investigate a multi‐agent moral‐hazard model where agents have expectation‐based reference‐dependent preferences à la K?szegi and Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, a principal may employ team incentives. Because the agents are loss averse, they have first‐order risk aversion to wage uncertainty. This causes the agents to work harder when their own failure is stochastically compensated through other agents' performance. In the optimal contract, agents with high performance are always rewarded, whereas agents with low performance are rewarded if and only if other agents' performance is high.     

Endogenous Social Comparisons and the Internal Organization of Firms

Should workers of a firm be organizationally integrated to realize benefits from benchmarking? Or should they be separated to preclude horizontal social comparisons? This paper highlights a trade‐off that arises if social comparisons in firms are endogenous. We analyze a principal multi‐agent model in which the principal trades off the reduction of agents' risk exposures by use of relative performance evaluation and the thereby induced social comparisons for which agents must be compensated. Contrary to standard theoretical predictions, relative performance evaluation is optimal only if the performance measures are sufficiently correlated relative to the agents' regard for others. Copyright © 2011 John Wiley & Sons, Ltd.     

Asymmetric‐information allocation to avoid coordination failure

In the context of team production, this paper studies the optimal (deterministic and stochastic) information allocation that implements desired effort levels as the unique Bayesian equilibrium. We show that under certain conditions, it is optimal to asymmetrically inform agents even though they may be ex ante symmetric. The main intuition is that informing the agents asymmetrically can be effective in avoiding “bad” equilibria, that is, equilibria with coordination failure.     

Co-employment of permanently and temporarily employed agents

One-shot interaction and repeated interaction often co-exist in the real world. We study possible behavioral effects of this co-existence in a principal-agent setting, in which a principal simultaneously employs a permanent and a temporary agent. Our experimental results indicate that there is “discrimination” between the two agents and that the available information for agents determines the extent of this discrimination, even though the theoretical solution of the game implies equal treatment of agents. Discrimination is, thus, a consequence of reciprocity. Agents that are discriminated against react negatively by withholding effort.     

Do tournaments solve the adverse selection problem?

This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination or differential contracting in certain business practice settings. The paper examines the problem of a principal contracting with multiple agents whose activities are subject to common shocks. The presence of common shocks invites the use of relative performance evaluation to minimize the costs of moral hazard. But, in the additional presence of adverse selection, the analysis shows that there may be no need for ex ante screening through menus of offers. This is so because the principal becomes better informed ex post about agent types, via the realization of common uncertainty, and can effectively penalize or reward the agents ex post. Thus, unlike the standard adverse selection problem without common uncertainty where the principal always benefits from ex ante screening, it is shown that ex post sorting through relative performance evaluation reduces the scope for ex ante screening through menus, and can eliminate it completely if agents are known to not be very heterogeneous. This is consistent with observed practice in industries where the primary compensation mechanism is a cardinal tournament which is uniform among employees. The analysis connotes that by using relative instead of absolute performance measures, firms with employees who are not substantially heterogeneous not only can alleviate the agency problem, but there is also no need to extract the agents' ex ante private information about their innate abilities via a screening menu.     

Profit sharing with a contest among agents

We consider how an internal competition in the form of a contest among agents can be combined with profit sharing in team production. The principal can choose to share between the principal and the agents as well as the sharing rule with a competitive contest among the agents. We show that under some conditions, a pure strategy equilibrium of profit sharing exists. In equilibrium, internal sharing involves a contest that is more competitive than proportional sharing, and the principal can get higher profit compared to proportional sharing.     

The effect of communication in incentive systems—an experimental study

In organizational theory, it is a widely accepted postulate that cooperation among subjects is enforceable. This assumption is essential for the evaluation of two frequently discussed incentive systems: team and tournament compensation. Whereas in team‐based pay systems cooperation is highly desired, cooperation in rank‐order tournaments—labeled as ‘collusion’—is regarded as one of the main drawbacks of relative performance evaluation. In this experimental study, two different communication technologies are introduced into both incentive environments. The results indicate that when only limited communication is permitted subjects tend to cheat on each other in the tournament rather than in the team setting. Interestingly, allowing subjects to exchange emails leads to a similarly stable cooperation in both incentive systems. Copyright © 2006 John Wiley & Sons, Ltd.     

Feedback in Tournaments under Commitment Problems: Experimental Evidence

We theoretically as well as experimentally analyze tournaments in which one of the agents leads over the other before entering the tournament, that is, in which one of the competitors benefits from a head start. The principal may decide upon informing the agents about the degree of this asymmetry. She cannot commit to giving feedback ex ante or not and, thus, chooses the strategy that is optimal for her ex post. In equilibrium, the principal reveals information if the asymmetry is not too large. Our experimental findings qualitatively confirm our theoretical prediction. Moreover, behavior of the principal and the agents is well aligned to each other.     

Relative Home‐Court Advantage: The Impact of Travel on Team Production When One Team is Closer than its Opponent to a Neutral Game Site

Using data from the National Collegiate Athletic Association Men's Basketball Tournament, I examine the impact of travel on team production in a setting where one team is geographically closer than its opponent to a neutral site. I hypothesize and find that the closer team, or relative home team, has a relative home‐court advantage that helps it to out‐produce its opponent. When the relative home team travels a much shorter distance than its opponent to a neutral site, binary logistic and ordinary least squares regressions indicate a positive relationship between relative home‐court advantage and, respectfully, winning and margin of victory. Copyright © 2015 John Wiley & Sons, Ltd.     

Seniority bias in a tournament

The paper presents a model where the probability of promotion tends to increase with seniority (overall labor market experience) without relying on the accumulation of general human capital. To this end, we consider the optimal design of a tournament (a relative compensation scheme) between two agents with different time horizon, the young and the old, in an overlapping generations framework. When the principal can only imperfectly monitor each agent’s effort level, the difference in time horizon leads to the ex post difference in the marginal value of effort between the two agents. In this case, the optimal tournament necessarily involves a bias towards the old agent. Within this framework, we also examine the relationship between: (1) the monitoring accuracy and the optimal bias; and (2) the value of outside options and the optimal bias.     

Task assignment,incentives and technological factors

In this paper, we examine the allocation of tasks between a principal and an agent considering their incentives to provide effort, their different abilities in handling tasks, and transmission costs. We focus our attention on two tasks: the first may be handled by the principal or by the agent, whereas the second is necessarily carried out by the agent. Under a fully decentralised organisation, the agent performs both tasks, whereas, under partial delegation, the principal handles the first task and transfers the outcome to the agent who handles the second task. Assuming technological complementarities, from our analysis it emerges that, if there is imperfect observability of effort, full delegation is better at eliciting effort by the agent in the second task, whereas, in comparison with partial delegation, it lowers effort in the first task. Although with contractible effort, the choice between the two organisational forms depends only on transmission costs and on the relative ability of its members, when moral hazard problems are taken into account, the organisational choice is related to the relative importance played by the two tasks in production. If the agent's task is relatively important in production, full delegation, encouraging a higher level of effort in this task, may be optimal, even if technological factors favour partial delegation. Copyright © 2008 John Wiley & Sons, Ltd.     

Upstream conduct and price authority with competing organizations

We characterize the degree of price authority that competing upstream principals award their downstream agents in a setting where these agents own private information about demand and incur nonverifiable distribution costs. Principals cannot internalize these costs through monetary incentives and design “permission sets” from which agents choose prices. The objective is to understand the forces shaping delegation and the constraints imposed on equilibrium prices. When principals behave noncooperatively, agents are biased toward excessively high prices because they pass on distribution costs to consumers. Hence, the permission set only features a price cap that is more likely to bind as products become closer substitutes, in sectors where distribution is sufficiently costly, and when demand is not too volatile. By contrast, when principals behave cooperatively, the optimal delegation scheme is richer and more complex. Because principals want to charge the monopoly price, the optimal permission set features a price floor when the distribution cost is sufficiently low, it features instead full discretion for moderate values of this cost, and only when it is high enough, a price cap is optimal. Surprisingly, while competition (as captured by stronger product substitutability) hinders delegation in the noncooperative regime, the opposite occurs when principals maximize industry profit.     

Management bonus plans in a multiple-agent environment

This paper analyses optimal linear incentive contracts in a single-principal multiple-agent setting. It is proved that the second-best share ratios are function of the other agents' effort levels as well their degrees of risk aversion and the risk aversion of the principal. It is also shown that the total bonus pool to all agents in a difficult to monitor (decentralized) firm is greater than the total bonus pool in a easier to monitor (centralized) firm.     

Relative rewards within team-based compensation

How to design compensation schemes to motivate team members appears to be one of the most challenging problems in the economic analysis of labour provision. We shed light on this issue by experimentally investigating team-based compensations with and without bonuses awarded to the highest contributors in teams.A purely team-based compensation scheme induces agents to voluntarily cooperate while introducing an additional relative reward increases effort and efficiency only when the bonus is substantial. In this case, however, the data suggests that tournament competition crowds out voluntary cooperation within a team.     

The mediating effect of psychological empowerment on the relationship between participative goal setting and team outcomes – a study in China

In the late twentieth century, it is popular to research the effect of participative goal setting. The general conclusion is that the relationship between participation and performance is inconsistent and unclear at individual level. With team becoming a more dominant mode in organizing, motivating, and managing, it is worthwhile to investigate the effect of participation in team goal setting. This study aims to test the mediating effect of psychological empowerment (PE) on the relationship between participative team goal setting and team identity and team performance. Executive MBA students (371) in 75 groups from China Europe International Business School in China participated in the study. The data from Business Strategy Game and questionnaire found positive relationship between participative team goal setting and team identification, and team performance is partially mediated by PE. Implications for the goal-setting theory and practice are discussed, and future research directions offered.     

Optimal coordination mechanisms in generalized principal–agent problems

The general principal–agent problem is formulated, in which agents have both private information and private decisions, unobservable to the principal. It is shown that the principal can restrict himself to incentive-compatible direct coordination mechanisms, in which agents report their information to the principal, who then recommends to them decisions forming a correlated equilibrium. In the finite case, optimal coordination mechanisms can be found by linear programming. Some basic issues relating to systems with many principals are also discussed. Non-cooperative equilibria between interacting principals do not necessarily exist, so quasi-equilibria are defined and shown to exist.