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Incentive Contracts and Peer Effects in the Workplace

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  • Pau Milán
  • Nicolás Oviedo Dávila

Abstract

Risk-averse workers in a team exert effort to produce joint output. Workers’ incentives are connected via chains of productivity spillovers, represented by a network of peer-effects. We study the problem of a principal offering wage contracts that simultaneously incentivize and insure agents. We solve for the optimal linear contract for any network and show that optimal incentives are loaded more heavily on workers that are more central in a specific way. We conveniently link firm profits to network structure via the networks spectral properties. When firms can’t personalize contracts, better connected workers ex- tract rents. In this case, a group composition result follows: large within-group differences in centrality can decrease firm’s profits. Finally, we find that modular production has important implications for how peer structures distribute incentives.

Suggested Citation

  • Pau Milán & Nicolás Oviedo Dávila, 2024. "Incentive Contracts and Peer Effects in the Workplace," Working Papers 1439, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1439
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    References listed on IDEAS

    as
    1. Barton H. Hamilton & Jack A. Nickerson & Hideo Owan, 2003. "Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 465-497, June.
    2. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 917-962.
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    More about this item

    Keywords

    moral hazard; Networks; Incentives; Organizations; contracts;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G52 - Financial Economics - - Household Finance - - - Insurance

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