An optimum multiple outcomes sharing model with multiple risk-averse agents

Purpose

The purpose of this paper is to propose an optimum form of incentive contracts with multiple outcomes and multiple agents.

Design/methodology/approach

Utility theory and principal-agent theory provide the underlying basis for this paper. A sample of 60 practitioners from public organizations and private companies participated in an exercise to validate the proposed model.

Findings

The paper shows that, in outcome sharing contracts, the contributions of agents toward outcomes are positively related, while agent effort costs, outcome uncertainty, outcome correlation and agent level of risk aversion are negatively related. The paper further demonstrates that outcome sharing is positively associated with the level of effort selected by the agents.

Originality/value

Outcome sharing models might be used in construction contracts to encourage the agent to act in the interests of the principal. However, few studies have looked at contracts with multiple outcomes and multiple agents. This paper contributes to the current practice of contract management through simplifying the complex nature of multiple incentive contracts and providing theoretical guidance for multi arrangements.