Contracts with interdependent preferences on SAET 2023
During Society for the Advancement of Economic Theory 2023 Conference we went back with the study on contracts between a principal and multiple agents with interdependent preferences. We characterize cost effective contracts, and relate the direction of co-movement in rewards -- "joint liability" (positive) or "tournaments" (negative) -- to the assumed structure of preference interdependence. We also study the implications of preference interdependence for the principal's payoffs. We identify two asymmetries. First, the optimal contract leans towards joint liability rather than tournaments, especially in larger teams, in a sense made precise in the paper. Second, when the mechanism-design problem is augmented by robustness constraints designed to eliminate multiple equilibria, for small teams the principal may prefer teams linked via adversarial rather than altruistic preferences.