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Team-Based Incentives in Problem-Solving Organizations

Author

Listed:
  • Jin-Hyuk Kim
  • Nick Vikander

Abstract

This article investigates a repeated employment relationship between a principal and a team of agents hired to solve a series of problems. With non-verifiable output, rewarding agents based on team performance can relax the principal’s credibility constraint by smoothing bonus payments over time. Team incentives also induce free-riding, but the principal prefers them to individual incentives if effort costs are relatively high and problems difficult to solve. We show that a simple mixture of an individual and team bonus constitutes the optimal relational contract under joint performance evaluation. The optimal contract may be inefficient when team size is endogenous, as rewarding team performance forces the principal to share surplus with agents, but may allow him to motivate a larger group. (JEL L14, M52).

Suggested Citation

  • Jin-Hyuk Kim & Nick Vikander, 2015. "Team-Based Incentives in Problem-Solving Organizations," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(2), pages 262-286.
    • Handle: RePEc:oup:jleorg:v:31:y:2015:i:2:p:262-286.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewt017
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    Citations

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    Cited by:

    1. Matthias Fahn & Hendrik Hakenes, 2019. "Teamwork as a Self-Disciplining Device," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 1-32, November.
    2. Joyee Deb & Jin Li & Arijit Mukherjee, 2015. "Relational Contracts with Subjective Peer Evaluations," Cowles Foundation Discussion Papers 1995, Cowles Foundation for Research in Economics, Yale University.
    3. Robert Butler & Liam J. A. Lenten & Patrick Massey, 2020. "Bonus incentives and team effort levels: Evidence from the “Field”," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(5), pages 539-550, November.
    4. Alice Peng-Ju Su, 2019. "Team incentives with imperfect mutual inference," International Journal of Game Theory, Springer;Game Theory Society, vol. 48(2), pages 687-712, June.

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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