“Robust Incentives for Teams”, 2022-07-01 (; backlinks):
We show that demanding team incentives to be robust to nonquantifiable uncertainty about the game played by the agents leads to contracts that align the agents’ interests. Such contracts have a natural interpretation as team-based compensation.
Under budget balance they reduce to linear contracts, thus identifying profit-sharing, or equity, as an optimal contract absent a sink or a source of funds. A linear contract also gives the best profit guarantee to an outside residual claimant.
These contracts still suffer from the free-rider problem, but a positive guarantee obtains if and only if the technology known to the contract designer is sufficiently productive.
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