DOI: 10.1111/iere.70125 ISSN: 0020-6598
Multi‐Agent Contracting With Network Externalities
Yang Sun, Wei ZhaoABSTRACT
This paper analyzes how the structure of externalities‐encompassing both pure spillovers and interactive components‐reshapes the classic trade‐off between incentives and risk in multi‐agent contracts. The interplay of network effects and moral hazard generates congestion effects among agents with a common neighbor, which we decompose into a sum of weighted Katz‐Bonacich centralities. This tractable characterization enables clear comparative statics on the externality structure. We further apply the framework to examine how organization structures shape firm boundaries, and the design of Pigovian taxes to generate social security.