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Asian Review of Financial Research, Vol., No..
pp.896~917
pp.896~917
Optimal Multi-Agent Performance Measures for Team Contracts
Hyeng Keun Koo School of Business Administration, Ajou University
Gyoocheol Shim The Bank of Korea, Seoul
Jaeyoung Sung Department of Finance (M/C 168), University of Illinois at Chicago, 601 South Morgan Street, Chicago, Illinois
We present a continuous-time contracting model under moral hazard with many agents. The principal contracts many agents as a team, and they jointly produce correlated outcomes. We show the optimal contract for each agent is linear in outcomes of all other agents as well as his/her own. The structure of the optimal contract strikingly reveals that the optimal aggregate performance measure in general can be orthogonally decomposed into two statistics: one is a sucient statistic, and the other a non-sucient statistic. As a consequence, the optimal aggregate performance measure in general is not a sucient statistic, unless the principal is risk neutral. We further discuss agents' optimal eort choices using a \quadratic-cost" example, which also strikingly suggests that team contracts sometimes provide lower-powered eort incentives than individually separate contracts do.
Hyeng Keun Koo
Gyoocheol Shim
Jaeyoung Sung
We present a continuous-time contracting model under moral hazard with many agents. The principal contracts many agents as a team, and they jointly produce correlated outcomes. We show the optimal contract for each agent is linear in outcomes of all other agents as well as his/her own. The structure of the optimal contract strikingly reveals that the optimal aggregate performance measure in general can be orthogonally decomposed into two statistics: one is a sucient statistic, and the other a non-sucient statistic. As a consequence, the optimal aggregate performance measure in general is not a sucient statistic, unless the principal is risk neutral. We further discuss agents' optimal eort choices using a \quadratic-cost" example, which also strikingly suggests that team contracts sometimes provide lower-powered eort incentives than individually separate contracts do.