CRIEFF Discussion Paper Number 0106

Incentives, Cooperation and Multiple Equilibria in The Firm

Felix FitzRoy

Abstract
A model with observable productive effort and unobservable productive cooperation by individuals in a team or firm is developed here. Cooperation by coworkers increases job-satisfaction and productivity, and this complementarity interacts with incentives for observed effort. Multiple Nash equilibria in individual actions may arise, with perverse effects of incentive pay for observed effort in some cases. A small group incentive, even in a large team, can destabilise or block inefficient equilibrium with minimal cooperation, and generate a Pareto superior equilibrium, thus explaining observed effects of profit sharing and 'solving' the 1/N problem.

JEL Classifications
J3, L2

Keywords
Incentives, Firm Organization

Felix FitzRoy
University of St Andrews

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