We analyze a moral hazard problem where a firm incentivizes a team of com- plementary workers by designing a robust incentive scheme that relies on indi- vidual and team performance measures. While using both measures minimizes information rents, team-performance bonuses expose workers to strategic uncer- tainty 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 com- plete 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 un- raveling result that only benefits the firm, delivering the same payoffs as the firm-preferred equilibrium. That is, competition gives rise to a self-promotion trap.
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FAS Microeconomics Theory Seminar Series