Endogenous leadership in incentive contracts

We study the effect of leadership on incentive contracts in a moral-hazard framework. In our model, agents are allowed to choose the timing of their actions. The agents may choose their effort levels simultaneously or sequentially. We show that relative performance evaluation leads to a subgame in which agents make simultaneous effort choices, whereas joint performance evaluation yields a subgame in which agents make sequential effort choices. Since agents exert more effort in the sequential game, the principal uses joint performance evaluation to induce the leader-follower relationship among agents. (C) 2012 Elsevier B.V. All rights reserved.