Econometrica: Jul, 2022, Volume 90, Issue 4
Robust Incentives for Teams
https://doi.org/10.3982/ECTA16280
p. 1583-1613
Tianjiao Dai, Juuso Toikka
We show that demanding team incentives to be robust to nonquantifiable uncertainty about the game played by the agents leads to contracts that align the agents' interests. Such contracts have a natural interpretation as teamābased compensation. Under budget balance they reduce to linear contracts, thus identifying profitāsharing, or equity, as an optimal contract absent a sink or a source of funds. A linear contract also gives the best profit guarantee to an outside residual claimant. These contracts still suffer from the freeārider problem, but a positive guarantee obtains if and only if the technology known to the contract designer is sufficiently productive.