Do Contracts Help? A Team Formation Perspective
AbstractEconomists 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.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2011-12.
Date of creation: 12 Sep 2011
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Web page: http://www.econ.au.dk/afn/
team formation; hedonic game; moral hazard; assortative partition;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-22 (All new papers)
- NEP-CTA-2011-09-22 (Contract Theory & Applications)
- NEP-GTH-2011-09-22 (Game Theory)
- NEP-MIC-2011-09-22 (Microeconomics)
- NEP-NET-2011-09-22 (Network Economics)
- NEP-PPM-2011-09-22 (Project, Program & Portfolio Management)
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