Optimal incentives for sequential production processes

Abstract

I study optimal incentive schemes in organizations where agents perform their tasks sequentially. I consider a model in which agents' effort decisions are mapped into the probability of the project's success. An optimal investment‐inducing mechanism allocates rewards to agents so as to induce all of them to exert effort in equilibrium at minimal cost to the principal. I characterize the unique optimal mechanism in several versions of my benchmark model. I also address the problem of allocating individuals with diverse qualifications to different slots of the production process as well as allocating tasks of different importance across different agents.

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