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This is a Quantitative Study study.

October 17, 2025

Privacy and Team Incentives

ABAndrea M BuffaUniversity of Colorado Boulder QLQing LiuHuanggang Normal University LWLucy WhiteBoston University

Key Points

The model shows that when contracts are private, incentives for agents can be significantly affected by the principal's actions.
Delegating contract authority to the most skilled agent raises collective output and effort while also enabling rent extraction.
The findings indicate that optimal contract structures vary based on skill distribution among agents and the sensitivity of joint output to effort.
Mitigating principal opportunism through endogenous hierarchies highlights the importance of contract privacy in team dynamics.

Abstract

ABSTRACT Real‐world contracts are typically private, observed only by their direct signatories, so agents working together are vulnerable to the principal opportunistically reducing other agents' incentives. The principal can mitigate this commitment problem by giving the most skilled agent a budget and delegating authority to write other agents' contracts. This endogenous hierarchy, never optimal with public contracts, raises effort, output, and compensation but allows rent extraction. The principal prefers it when contracts are opaque enough, skill is sufficiently heterogeneous across agents, and joint output is sensitive enough to effort. Our model provides novel predictions for the structure of banking syndicates.

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