  The development of cooperative relations within and between firms plays an
important role in the successful implementation of business strategy. How to
produce such relations is less well understood. We build on work in relational
contract theory and the evolution of cooperation to examine the conditions
under which group based incentives outperform individual based incentives and
how they produce more cooperative behavior. Group interactions are modeled as
iterated games in which individuals learn optimal strategies under individual
and group based reward mechanisms. The space of possible games is examined and
it is found that, when individual and group interests are not aligned, group
evaluation and reward systems lead to higher group performance and,
counter-intuitively, higher individual performance. Such groups include
individuals who, quite differently to free-riders, sacrifice their own
performance for the good of the group. We discuss the implications of these
results for the design of incentive systems.
