Optimal incentives for teams

Much of the existing theory of incentives describes a static relationship t hat lasts for just one transaction. This static assumption is not only unre alistic, but the resulting predictions appear to be at odds with many work organizations. The current paper introduces possible long-term interaction among agents, and studies how the design of explicit incentives and work or ganizations can exploit, and interact with, the implicit incentives generat ed by the repeated interaction of the agents. The optimal incentive scheme is shown to display observed features of the increasingly popular "teams," such as the use of low-powered, group incentives.