Technology, team production and incentives

- Winter (2009) shows that higher rewards can induce some agents to reduce their equilibrium effort (incentive reversal).
- We show incentive reversal can arise when workers' rewards are based on team output.
- We show that all workers can decrease their effort in response to an increase in team productivity.
- Incentive reversal can occur in our model with both simultaneous and sequential investment.

Incentive reversal (IR) is when higher rewards induce some agents to reduce their effort (Winter 2009). We show that IR can hold for all agents when: there is an improvement in production technology; and rewards are based on team output. Whilst IR requires at least one worker's marginal return to be decreasing in team productivity when agents invest simultaneously, this is not necessary with sequential investments. Rather, IR can occur with sequential investment when the marginal return of effort for all agents is increasing with improvements in technology.