  I study a moral hazard problem between a principal and multiple agents who
experience positive peer effects represented by a (weighted) network. Under the
optimal linear contract, the principal provides high-powered incentives to
central agents in the network in order to exploit the larger incentive
spillovers such agents create. The analysis reveals a novel measure of network
centrality that captures rich channels of direct and indirect incentive
spillovers and characterizes the optimal contract and its induced equilibrium
efforts. The notion of centrality relevant for incentive spillovers in the
model emphasizes the role of pairs of agents who link to common neighbors in
the network. This characterization leads to a measure of marginal network
effects and identifies the agents whom the principal targets with stronger
incentives in response to the addition (or strengthening) of a link. When the
principal can position agents with heterogeneous costs of effort in the
network, the principal prefers to place low-cost agents in central positions.
The results shed light on how firms can increase productivity through corporate
culture, office layout, and social interactions.
