COOPERATION AND COMPETITION IN ORGANIZATIONS - A DYNAMIC PERSPECTIVE

In static principal-agent relationships, cooperation and competition among agents both yield higher welfare than independent compensation - both modes of job design improve the tradeoff between risk and explicit incentives. In dynamic settings, welfare is also affected by implicit incentives, in particular, the ratchet effect. I characterize the effects of job design decisions on implicit incentives, showing that they differ in nature from explicit incentive effects and may be the dominant ones. Even if a decision about job design improves the static risk/incentive tradeoff, it may worsen the ratchet effect by so much that welfare falls.