Collective Contracting for Coordination

Abstract:

The success of a team project requires multiple agents to participate and exert effort. Beyond the classical single-agent moral hazard problem, strategic complementarity introduces two sources of strategic risk: agents may shirk because they fear others will shirk, or decline to participate because they fear others will not join. A principal seeks to design contracts that guarantee full participation and effort. We introduce collective contracts, under which each agent's reward depends not only on the project outcome but also on the participation profile. We show that, under the optimal collective contract, the principal can implement her desired outcome without paying any incentive rent associated with strategic risk. The two sources of strategic risk are resolved by two distinct mechanisms: a sufficiently attractive outside option triggers forward-induction reasoning, ensuring that any agent who accepts the contract must exert effort; and conditioning rewards on the participation profile guarantees participation as the collective contract protects each agent's outside option even if others reject the contract. The optimal collective contract takes the form of an all-or-nothing mechanism, under which any single agent's rejection effectively voids the participation of the others. We further compare our findings with Winter (2004) and Halac, Lipnowski, and Rappoport (2021), and discuss applications including syndicated loans and venture-capital fundraising.