With S. Nageeb Ali
With Kareen Rozen
Abstract: We study optimal contracting in teams with peer monitoring and moral hazard, featuring stylized aspects of production environments with complex tasks. Agents have many opportunities to shirk, task-level monitoring is needed to provide useful incentives, and because it is difficult to write individual performance into formal contracts, incentives are provided informally, using wasteful sanctions like guilt and shame, or slowed promotion. These features give rise to optimal contracts with “empty promises” and endogenous supervision structures. Agents optimally make more promises than they intend to keep, leading to the concentration of supervisory responsibility in the hands of one or two agents.
Working paper 9/23/2010 (stay tuned for an updated version in fall 2012)
Note: Satoru Takahashi discovered an error in a previous version of this paper. I am working on figuring out how to correct it. For now, I am posting a shorter version that contains only the correct results. Please do not cite, circulate, or refer to any version of the paper dated prior to 2009.
Abstract: This paper proves folk theorems for repeated games with private information, communication, and monetary transfers, in which signal spaces may be arbitrary, signals may be statistically interdependent, and payoffs for each player may depend on the signals of other players.