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Team incentives with imperfect mutual inference

  • Alice Peng-Ju SuEmail author
Original Paper

Abstract

I study the optimal team incentive when the agents can coordinate private actions through repeated interaction with imperfect public monitoring. The agents are able to imperfectly infer each other’s private actions via the stochastically correlated measurements. Correlation of measurement noise, besides its risk sharing role in the conventional multiple-agent moral hazard problem, is crucial to the accuracy of each agent’s inference. The principal’s choice of performance pay to provide incentive via inducing competition or coordination among the agents thus exhibits the trade-off between risk sharing and mutual inference between the agents. I characterize the optimal form of performance pay with respect to the correlation of measurement noise. Whether the conventional theoretical prediction holds depends on how the agents form the mutual inference, based on an exogenous standard or formed endogenously.

Keywords

Team incentive Relative performance evaluation Joint performance evaluation Imperfect monitoring Collusion 

JEL Classification

D86 D82 J33 

Notes

Acknowledgements

Suggestions by the co-editor, the associate editor and two anonymous referees have greatly improved this paper. I am grateful to Fahad Khalil, Jacques Lawarrée, Charles Hill, Wei Li, Dennis O’Dea, Luis Rayo, Lan Shi, and Quan Wen, as well as participants at the 44th EARIE, for their helpful comments and suggestions. Financial support from the Ministry of Science and Technology (Grant number MOST 105-2410-H-305-012-) is gratefully acknowledged.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of EconomicsNational Taipei UniversityNew Taipei CityTaiwan

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