Author:Yingjie Niu, Zhentao Zou

Abstract: We develop a continuous-time dynamic multi-agent contracting model in which the principal is unsure about the distributions of the project's terminal payoffs and worries about model misspecification. With model uncertainty, workers' wages depend on the outputs of other unrelated projects and the optimal contracts exhibit overdetermination. We demonstrate an inverse U-shaped relationship between the extent of overdetermination and group size. Moreover, model uncertainty induces wage compression, especially in small firms as the empirical evidence demonstrates. Finally, expanding the group size increases the average project value by mitigating the negative impacts of ambiguity.

Keywords: Multi-agents; Ambiguity; Group size; Overdetermination; Wage compression

This paper was published in the November 2024 issue (Volume 148) of Games and Economic Behavior, a top-tier international journal in game theory. The first author is Assistant Professor Yingjie Niu from the School of Finance at Shanghai University of Finance and Economics, and the corresponding author is Associate Professor Zhentao Zou from the School of Economics and Management at Wuhan University.

Link: https://doi.org/10.1016/j.geb.2024.09.012