Robust dynamic contracts with multiple agents

Abstract

We develop a continuous-time dynamic multi-agent contracting model in which the principal is unsure about the distributions of the project's terminal payoffs and worries about model misspecification. With model uncertainty, workers' wages depend on the outputs of other unrelated projects and the optimal contracts exhibit overdetermination. We demonstrate an inverse U-shaped relationship between the extent of overdetermination and group size. Moreover, model uncertainty induces wage compression, especially in small firms as the empirical evidence demonstrates. Finally, expanding the group size increases the average project value by mitigating the negative impacts of ambiguity.