Optimal Incentives for Teams

Abstract

Much of the existing theory of incentives describes a static relationship that lasts for just one transaction. This static assumption is not only unrealistic, but the resulting predictions appear to be at odds with many work organizations. The current paper introduces possible long-term interaction among agents, and studies how the design of explicit incentives and work organizations can exploit, and interact with, the implicit incentives generated by the repeated interaction of the agents. The optimal incentive scheme is shown to display observed features of the increasingly popular “teams,” such as the use of low-powered, group incentives. (JEL D23, J33, J41, L23)