Incentive Design with Spillovers

Abstract: A principal uses payments conditioned on stochastic outcomes of a team project to elicit costly effort from the team members. We develop a multi-agent generalization of a classic first-order approach to contract optimization by leveraging methods from network games. The main results characterize the optimal allocation of incentive pay across agents and outcomes. Incentive optimality requires equalizing, across agents, a product of (i) individual productivity (ii) organizational centrality and (iii) responsiveness to monetary incentives.