Contracts with Interdependent Preferences / Debraj Ray, Marek Weretka.

Format:

Book

Author/Creator:

Ray, Debraj.

Contributor:

National Bureau of Economic Research.

Weretka, Marek.

Series:

Working Paper Series (National Bureau of Economic Research) no. w32290.

NBER working paper series no. w32290

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2024.

Summary:

A principal contracts with multiple agents, as in Lazear and Rosen (1981) and Green and Stokey (1983). The setup is classical except for the assumption that agents have interdependent preferences. We characterize cost effective contracts, and relate the direction of co-movement in rewards -- "joint liability" (positive) or "tournaments" (negative) -- to the assumed structure of preference interdependence. We also study the implications of preference interdependence for the principal's payoffs. We identify two asymmetries. First, the optimal contract leans towards joint liability rather than tournaments, especially in larger teams, in a sense made precise in the paper. Second, when the mechanism-design problem is augmented by robustness constraints designed to eliminate multiple equilibria, the principal may prefer teams linked via adversarial rather than altruistic preferences.

Notes:

Print version record

March 2024.