Should They Compete or Should They Cooperate? The View of Agency Theory

What is the most efficient way of designing incentives in an organization? Over the past five decades, agency theory has provided various answers to this crucial question. This line of research suggests that, depending on the organizational context, the optimal approach to providing incentives may involve either relying on collective compensations or, conversely, employing relative performance evaluations. In the first scenario, cooperation among agents is the key aspect of the organization. In the second, competition prevails. This paper provides a comprehensive overview of this extensive literature with the aim of understanding the conditions under which one or the other type of incentive schemes is more desirable for the principal of the organization. To this end, we use a flexible and versatile model capable of addressing a wide range of scenarios characterized by different technologies, information constraints, and behavioral norms.