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Incentive Contracts and Peer Effects in the Workplace

Author

Listed:
  • Marc Claveria-Mayol
  • Pau Mil'an
  • Nicol'as Oviedo-D'avila

Abstract

We study the problem of a principal designing wage contracts that simultaneously incentivize and insure workers. Workers' incentives are connected through chains of productivity spillovers, represented by a network of peer-effects. We solve for the optimal linear contract for any network and show that optimal incentives are steeper for more central workers. We link firm profits to organizations' structure via the spectral properties of the coworker network. When production is modular, the incentive allocation rule is sensitive to the link structure across and within modules. When firms can't write personalize contracts, better connected workers extract rents. In this case, unemployment emerges endogenously because large within-group differences in centrality can decrease firm's profits.

Suggested Citation

  • Marc Claveria-Mayol & Pau Mil'an & Nicol'as Oviedo-D'avila, 2024. "Incentive Contracts and Peer Effects in the Workplace," Papers 2406.11712, arXiv.org, revised Aug 2024.
    • Handle: RePEc:arx:papers:2406.11712
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    File URL: http://arxiv.org/pdf/2406.11712
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