Incentive Design with Spillovers
This work addresses incentive design for teams with spillovers, which is an incremental contribution to contract theory and organizational economics.
The paper tackles the problem of designing optimal incentive payments for team members in a project with spillover effects, using a multi-agent generalization of contract optimization and network game methods, and finds that optimal incentives equalize a product of individual productivity, organizational centrality, and responsiveness to incentives.
A principal uses payments conditioned on stochastic outcomes of a team project to elicit costly effort from the team members. We develop a multi-agent generalization of a classic first-order approach to contract optimization by leveraging methods from network games. The main results characterize the optimal allocation of incentive pay across agents and outcomes. Incentive optimality requires equalizing, across agents, a product of (i) individual productivity (ii) organizational centrality and (iii) responsiveness to monetary incentives. We specialize the model to explore several applied questions, including whether compensation should reward individual ability or collaborativeness and how the strength of complementarities shapes pay dispersion.