We study a dynamic multi-agent model with a verifiable team performance measure and non-verifiable individual measures. The optimal contract can be interpreted as an explicit contract that specifies a minimum bonus pool as a function of the verifiable measure and an implicit contract that gives the principal discretion to increase the size of the pool and to allocate it among the agents. To mitigate the threat of collusion, the optimal contract often converts any exogenous productive interdependence into strategic payoff independence for the agents. Under productive complements, an unconditional bonus pool (pay without performance) can be less costly than one conditioned on the verifiable team measure.

ABSTRACT In a dynamic setting with demand following a random process, we ask how investment and operating decisions can be delegated to a manager with unknown time preferences. Only the manager observes the demand realization in each period and, therefore, has private information when choosing whether to acquire the productive asset and, subsequently, how to utilize it. We derive accrual accounting-based performance measures under which the manager will make the efficient decisions provided the investment date is exogenously given. We show that in an environment where demand follows a martingale process, the corresponding accounting rules are more decelerated if the firm has the option to idle capacity in case of negative demand shocks. We then describe the limitations of accounting-based performance measures in a scenario where the investment date is endogenously determined, i.e., the firm has an option to wait.