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Do Contracts Help? A Team Formation Perspective

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  • Norovsambuu Tumennasan

    (Department of Economics and Business, Aarhus University, Denmark)

Abstract

Economists perceive moral hazard as an undesirable problem because it undermines efficiency. Carefully designed contracts can mitigate the moral hazard problem, but this assumes that a team is already formed. This paper demonstrates that these contracts are sometimes the reason why teams do not form. Formally, we study the team formation problem in which the agents’ efforts are not verifiable and the size of teams does not exceed quota r. We show that if the team members can make only balanced transfers, then moral hazard affects stability adversely. However, if the team members cannot make transfers, then moral hazard affects stability positively in a large class of games. For example, a stable team structure exists if teams produce public goods or if the quota is two. However, these existence results no longer hold if efforts are verifiable.

Suggested Citation

  • Norovsambuu Tumennasan, 2011. "Do Contracts Help? A Team Formation Perspective," Economics Working Papers 2011-12, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2011-12
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    File URL: https://repec.econ.au.dk/repec/afn/wp/11/wp11_12.pdf
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    Cited by:

    1. Norovsambuu Tumennasan, 2014. "Moral hazard and stability," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(3), pages 659-682, October.

    More about this item

    Keywords

    team formation; hedonic game; moral hazard; assortative partition;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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