Team composition, worker effort and welfare

A successful organization needs the right team. We explore the optimal mix of familiar workers (who we call incumbents) and less familiar workers (newcomers) when production is group-based. If incumbents have a lower marginal return of effort, they will have less incentive to invest relative to newcomers. This is true, even when incumbents produce more for any given level of effort. This creates a tradeoff: less familiar agents will invest more whereas a more familiar team is inherently more productive. In our setup, the non-investing principal (weakly) prefers less familiar agents than the team that maximizes second-best surplus. On the other hand (symmetric) agents prefer a more familiar teammate compared with the second-best option. These insights have implications for team composition, job rotation and worker tenure.