Contracting with synergies
By: Alex Edmans, Itay Goldstein, John Y. Zhu
Contributors: Goldstein,  Itay; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17606; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17606.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This paper studies optimal contracting under synergies.  We define influence as the extent to which effort by one agent reduces a colleague's marginal cost of effort, and synergy to be the sum of the (unidimensional) influence parameters across a pair of agents.  In a two-agent model, effort levels are equal even if influence is asymmetric.  The optimal effort level depends only on total synergy and not individual influence parameters.  An increase in synergy raises total effort and total pay, consistent with strong equity incentives in small firms, including among low-level employees.  The influence parameters matter only for individual pay.  Pay is asymmetric, with the more influential agent being paid more, even though the level and productivity of effort are both symmetric.  With three agents, effort levels differ and are higher for more synergistic agents.  An increase in the synergy between two agents can lead to the third agent being excluded from the team, even if his productivity is unchanged.  This has implications for optimal team composition and firm boundaries.  Agents that influence a greater number of colleagues receive higher wages, consistent with the salary differential between CEOs and divisional managers"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/17/2012.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.