Detrimental Incentive Mechanisms in Dynamic Principal-Agent Relationships

This article explores a dynamic moral hazard setting in which a principal hires a team of agents for a project. As the project generates revenue upon completion, the principal incentivizes agents' efforts by designing bonuses for success. If bonuses are provided through spot or renegotiation-proof long-term contracts, an increase in project revenue may adversely affect (i) agents' expected payoffs, (ii) the principal's expected profit, and (iii) the likelihood of project success. Even for long-term contracts under full commitment, the detrimental effects on agents and project success can persist, while, for the principal, these incentive mechanisms are more favorable and render higher revenues necessarily beneficial