Contracting With Synergies

Itay Goldstein, Alex Edmans and John Zhu

No 9559, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies his colleagues exert on each other. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries.

Keywords: Contract theory; Complementarities; Principal-agent problem; Multiple agents; Teams; Synergies; Influence (search for similar items in EconPapers)
JEL-codes: D86 J31 J33 (search for similar items in EconPapers)
Date: 2013-07
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hpe, nep-hrm and nep-mic
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Contracting With Synergies (2013)
Working Paper: Contracting with Synergies (2011)
Working Paper: Contracting With Synergies (2011)
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