Implicit Incentives and Delegation in Teams

We study an infinitely repeated game of team production, where agents must supply costly effort under moral hazard. The principal also has the option to delegate an additional production-relevant decision to a team member. We provide conditions under which delegation changes the scope of peer sanction and thus influences the implicit incentives generated by the agents’ repeated interaction. Delegation can then become strictly optimal, despite misaligned preferences and symmetric information regarding the efficient decision. We show that implicit incentives under delegation are strongest in diverse teams and use our results to discuss various aspects of organizational design, including self-organized teamwork. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by the Deutsche Forschungsgemeinschaft [Project-ID 403041268—TRR 266 Accounting for Transparency]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.02212 .