Project Contracting Strategies for Managing Team Dynamics

In this chapter we study a team dynamic problem in which a group of agents collaborate over time to complete a project. The project progresses at a rate that depends on the agents’ efforts, and it generates a payoff upon completion. First, we show that agents work harder the closer the project is to completion, and members of a larger team work harder than members of a smaller team—both individually and on aggregate—if and only if the project is sufficiently far from completion. Second, we analyze the problem faced by a manager who is the residual claimant of the project and she chooses the size of the team and the agents’ incentive contracts to maximize her discounted payoff. We show that the optimal symmetric contract compensates the agents only upon completion of the project. Finally, we endogenize the size of the project, where a bigger project is one that requires greater cumulative effort and generates a larger upon completion. We show that if the manager can commit to her optimal project size at the outset of the game, then she will choose a smaller project relative to the case without commitment. An implication of this result is that without commitment, the manager is better off delegating the decision rights over the project size to the agents.