Misaligning incentives in teams

In a multi-agent setting, we study the optimal design of monitoring and compensation to uniquely implement work under contracting frictions. The principal monitors workers flexibly but is constrained in the number of messages she can contract on. Our main result shows that misaligning workers’ incentives is optimal as it decreases the positive externalities they have on each other’s remuneration. This allows the principal to extract the full surplus from a team whose size grows exponentially with the number of messages. With the strongest contracting frictions, i.e., two available messages, the optimal contract features two sub-teams competing for a bonus.