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Incentive Contracts and Peer Effects in the Workplace

Author

Listed:
  • Marc Claveria-Mayol
  • Nicolás Oviedo Dávila
  • Pau Milán

Abstract

We analyze how firms should design wage contracts when workers collaborate in teams and effort costs depend on colleagues through a peer network. Performancebased compensation generates incentives that cascade through the organization, which firms target to boost profits. We analyze optimal incentive design if firms can—and can't—fully discriminate across workers, and when the production technology is separable or complementary across divisions. When workers' effort is substitutable, the most central workers—those who influence most colleagues directly and indirectly—receive the steepest incentives only when output risk is sufficiently large; otherwise firms prioritize workers that are closer to those they influence. We derive a sufficient network statistic that measures the surplus loss when firms must compensate workers of varying centrality equally. Finally, when production technology exhibits complementarity across teams, stronger incentives are assigned to workers who influence colleagues in small teams that receive little influence from others. We apply our findings to organizational design questions, such as optimal firm structure and workforce investments.

Suggested Citation

  • Marc Claveria-Mayol & Nicolás Oviedo Dávila & Pau Milán, 2024. "Incentive Contracts and Peer Effects in the Workplace," Working Papers 1457, Barcelona School of Economics.
  • Handle: RePEc:bge:wpaper:1457
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    References listed on IDEAS

    as
    1. David Card & Alexandre Mas & Enrico Moretti & Emmanuel Saez, 2012. "Inequality at Work: The Effect of Peer Salaries on Job Satisfaction," American Economic Review, American Economic Association, vol. 102(6), pages 2981-3003, October.
    2. Maria Guadalupe & Julie Wulf, 2010. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 105-127, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    contracts; incentives; moral hazard; networks; organizations;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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