OPTIMAL MULTI-AGENT PERFORMANCE MEASURES FOR TEAM CONTRACTS

Authors: Keun Koo, Hyeng¹; Shim, Gyoocheol¹; Sung, Jaeyoung²

Source: Mathematical Finance, Volume 18, Number 4, October 2008 , pp. 649-667(19)

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Abstract:

We present a continuous-time contracting model under moral hazard with many agents. The principal contracts many agents as a team, and they jointly produce correlated outcomes. We show the optimal contract for each agent is linear in outcomes of all other agents as well as his/her own. The structure of the optimal contract strikingly reveals that the optimal aggregate performance measure in general can be orthogonally decomposed into two statistics: one is a sufficient statistic, and the other a nonsufficient statistic. As a consequence, the optimal aggregate performance measure in general is not a sufficient statistic, unless the principal is risk neutral. We further discuss agents' optimal effort choices using a “quadratic-cost” example, which also strikingly suggests that team contracts sometimes provide lower-powered effort incentives than individually separate contracts do.

Keywords: principal-agent problem; many agents; moral hazard; team; performance measure; contracts; continuous-time model; martingale method

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-9965.2008.00352.x

Affiliations: 1: Ajou University, Korea 2: Ajou University, Korea, and University of Illinois at Chicago

Publication date: 2008-10-01