Three essays on team incentive contracts in the presence of synergy

This dissertation consists of three essays on the economics of team incentive contracts. The first essay is a theoretical investigation concerning the impact of a principal’s choice of performance measures (team or individual output) in the presence of agent career concerns. In a team-output contract, welfare decreases in career concerns and tends to increase with the effects related to helping effort, which can increase the agent’s own and the other team member’s outputs simultaneously. However, only the latter marginal product of helping effort – representing the degree of team synergy – appears to significantly influence which contract yields higher welfare. When synergy is sufficiently large, a team-output contract can dominate the individual-output contract. Under both contracting scenarios, the agents’ variable wage profiles can increase or decrease over time depending on the relative strength of the agents’ career concerns. The second essay utilizes similar production technology and examines the incentive and welfare consequences of mixed contracts in a partnership model. A mixed contract is one that combines team-based compensation with a tournament reward based on individual performance. I show that the mixed contract can yield higher levels of welfare than the pure team-output contract, despite the possible adverse impacts that the contract may have on agent efforts. Furthermore, a mixed contract with a tournament based on alternative performance measures can generate higher levels of welfare than one that is based on individual output. In the third essay, I describe the design and results of an experiment devised to study how changes in synergy influence agent incentives under individual-output and team-output contracts. Consistent with the theoretical predictions derived from a simple model, the results show that when synergy is low, the individual-output contract induces higher levels of effort while in contrast, the team-output contact generates higher effort levels when synergy is high. Moreover, the observed strategic behavior of subjects in the experiment leads to differing levels of over-contributions across contracting scenarios. The three essays combine to help further our understanding of contract design and its impact on agent incentives in a team environment characterized by varying levels of synergy.