Working Paper: CEPR ID: DP9747
Authors: Alex Edmans; Itay Goldstein; John Zhu
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: complementarities; contract theory; influence; multiple agents; principal-agent problem; synergies; teams
JEL Codes: D86; J31; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Agent's effort (L85) | Reduced marginal cost of effort for colleagues (D29) |
| Agent's effort (L85) | Increased productivity for colleagues (O49) |
| Increase in synergy between two agents (C73) | Exclusion of a third agent from the team (D82) |
| Synergies (L14) | High pay differentials between CEOs and divisional managers (M12) |