Team-Based Incentives in Problem-Solving Organizations

This paper investigates a repeated employment relationship between a prin-cipal and agents hired to solve a series of problems. We show that under rela-tional contracts, the principal prefers team to individual incentives whenever problems are difficult to solve and the cost of effort is moderate. Team in-centives lead to free-riding but can also increase the principal’s credibility by smoothing bonus payments over time. If team size is endogenous, team incen-tives can increase efficiency by allowing the principal to motivate more agents. Yet the principal may still prefer inefficient individual incentives because they allow him to capture all surplus