No. 67: Implicit incentives and delegation in teams

Abstract

We study an infinitely-repeated game of team production, where agents must supply costly effort under moral hazard. The principal also has the option to delegate an additional production-relevant decision to a team member. We provide conditions under which delegation changes the scope of peer sanction and thus influences the implicit incentives generated by the agents‘ repeated interaction. Delegation can then become strictly optimal, despite misaligned preferences and symmetric information regarding the efficient decision. We show that implicit incentives under delegation are strongest in diverse teams and use our results to discuss various aspects of organisational design.