Matteo Camboni (Northwestern University) (Webinar)

“Monitoring Team Members: Information Waste and the Self-Promotion Trap”

Abstract. We analyze a moral hazard problem where a firm incentivizes a team of complementary workers by designing a robust incentive scheme that relies on individual and team performance measures. While using both measures minimizes information rents, team-performance bonuses expose workers to strategic uncertainty about their colleagues’ effort. We show that the firm typically sacrifices statistically-relevant information to curb strategic uncertainty, compensating some workers solely based on their individual performance. We provide a complete characterization of the optimal incentive scheme, highlighting how the firm discriminates among (possibly homogeneous) workers in terms of total rents, type of contract offered, and monitoring some workers more closely than others. Finally, we use this characterization to study the workers’ incentives to facilitate or hinder the firm’s monitoring. We show that competition for better contracts incentivizes workers to be more transparent, triggering an unraveling result that only benefits the firm, delivering the same payoffs as the firm-preferred equilibrium. That is, the competition gives rise to a self-promotion trap.