Performance Bundling Across Multiple Competitions

Abstract

In a multi-project contract environment with a single agent who is subject to limited liability, the optimality of performance bundling across all projects is well established: The agent should be rewarded only if all projects are successful. In this paper, we study performance bundling across multiple competitions between two (possibly asymmetric) players. We find that in addition to a beneficial cost-saving effect that diminishes with asymmetry across players, performance bundling causes a counterproductive unbalancing effect, which intensifies with this asymmetry. Thus, performance bundling is desirable only if the players are sufficiently symmetric. Otherwise, a set of independent contests is optimal.