Incentive Mechanism for Team Cooperation Based on Implicit Side Contract

It is difficult to implement cooperation in team because there is an inevitable free-riding problem. But, team members can sign implicit side contracts among them in dynamic game because there exists horizontal monitor in team production, which means that team members can monitor each other without any cost. The implicit side contracts regulate a retaliation mechanism, which can hold up any free-riding actions and so realize team cooperation if the retaliation mechanism is feasible and credible. We designs a two-period dynamic incentive mechanism that makes full use of the implicit side contracts, in which the strict contracts of group incentive compatibility are taken in the first period and the contracts of individual incentive compatibility are taken in the second period. This incentive mechanism ensures the retaliation mechanism feasible by which the gain from free-riding action in the first period is less than the loss from punishment of retaliation in the second period, and credible by which the retaliation does not do harms to own profits. And under such incentive mechanism, the play of a tit-for-tat strategy by which each team member promises to cooperate in the second period if and only if the other does not free ride in the first period, can realize team cooperation in dynamic game