Team-Based Incentives in Problem-Solving Organizations

This paper investigates a repeated employment relationship be-tween a principal and agents who he hires to solve a series of prob-lems. Each agent works independently, but the principal can choose to pay a team incentive bonus to all agents if any one of them solves a problem. We show that, under relational contracts, there is a range of pa-rameter values for which the principal prefers team incentives to in-dividual incentives. Team incentives create a problem of moral haz-ard, but they can also reduce the principal’s commitment problem by smoothing bonus payments over time. The latter effect is particularly strong when problems are difficult to solve. If team size is endoge-nous, team incentives can increase efficiency by allowing the principal to motivate a greater number of agents. However, in some such cases, the principal still chooses individual incentives because they allow him to appropriate more surplus. (JEL J41, M52