Teams in Relational Contracts

Abstract

We analyze relational contracting between a principal and a team of agents where only aggregate output is observable. We deduce optimal team incentive contracts under di¤erent set of assumptions, and show that the principal can use team size and team composition as instruments in order to improve incentives. In particular, the principal can strengthen the agents'incentives by composing teams that utilize stochastic dependencies between the agents'outputs. We also show that more agents in the team may under certain conditions increase each team member's e¤ort incentives, in particular if outputs are negatively correlated.