Scandinavian Working Papers in Business Administration

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2016/23: Teams in Relational Contracts

Ola Kvaløy () and Trond E. Olsen ()
Additional contact information
Ola Kvaløy: UiS Business School, University of Stavanger, Postal: University of Stavanger, UiS Business School, 4036 Stavanger, Norway
Trond E. Olsen: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: We analyze relational contracting between a principal and a team of agents where only aggregate output is observable. We deduce optimal team incentive contracts under di¤erent set of assumptions, and show that the principal can use team size and team composition as instruments in order to improve incentives. In particular, the principal can strengthen the agents' incentives by composing teams that utilize stochastic dependencies between the agents' outputs. We also show that more agents in the team may under certain conditions increase each team member's effort incentives, in particular if outputs are negatively correlated.

Keywords: Relational contracts; team incentive scheme

JEL-codes: D00; D20; D21; D80; D86

47 pages, December 16, 2016

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