An experimental comparison of incentive contracts in partnerships

Empirical work comparing individualized sharing and equal sharing schemes in partnerships has produced mixed results. Some studies find individualized sharing schemes superior, others find no difference, and still others find equal sharing schemes superior. This paper outlines a theory which reconciles these competing findings, and tests it with an experiment. We find that in conditions of high synergy (when the teammate’s effort has a proportionately larger impact on an agent’s output than the agent’s own effort), equal sharing schemes outperform individualized sharing schemes, while in conditions of low synergy, individualized sharing schemes outperform equal sharing schemes. These results are consistent with observations from the field. Our results have the potential to guide firms choosing between competing compensation contracts by identifying situations under which each contract type is likely to yield increased productivity.

► We outline a theory to reconcile the competing findings about contract ranking.
► Under high synergy, equal sharing schemes outperform individualized sharing schemes.
► Under low synergy, individualized sharing schemes outperform equal sharing schemes.
► The experimental results are consistent with our theoretical predictions.