Measurement Error and Incentive Pay

We will analyse the optimal incentive scheme when the risk-neutral principal contracts with many risk-averse agents. Each agent produces an individual contribution which jointly form a total output. Agents' efforts are unobservable and the principal cannot observe individual outputs without an error. Neither the observed individual output of an agent nor the observed total output of the whole team are then sufficient statistics for the actual individual output in the sense of Blackwell. We show that the mixed contract of the pure piece-rate contract and of the pure team contract then dominates the pure contracts from the principal's point of view