Optimal Contracts for Teams

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Abstract
In a team subject to both adverse selection (each member's ability is known only to himself) and moral hazard (effort cannot be observed), optimal contracts are, under certain conditions, linear in the team's output. The outcome is the same whether the principal observes just the total output or each individual's contribution. Thus monitoring is not needed to prevent shirking by team members; instead, the role of monitoring is to discipline the monitor.

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