On the Strategic Benefits of Diversity

This paper studies the relationship between functional diversity and team performance. The main question is whether diversity may entail strategic benefits that enable diverse teams to outperform homogenous teams even if the homogenous teams are more skilled on average, or diversity entails a direct efficiency loss a la Benabou (1996). Both ability diversity and cognitive diversity (Johnson- Laird (1983), Page (2008)) are studied, and the paper also considers the role of Becker and Murphy (1992)-type coordination costs. In all cases, the main message is that effort adjustments set off by greater diversity may significantly change the outcome in comparison with an assessment based on the more familiar direct effects. For example, a diverse team may outperform a homogenous team even if the elasticity of substitution is positive and less capable individuals therefore “drag down” the more capable individuals productivities; and under the same condition, a “superstar” may outperform a cognitively diverse team even though a positive elasticity of substitution implies decreasing returns to talent in the sense of Rosen (1981). The paper discusses the implications of these findings for the general diversity debate, for optimal team selection, and for market salaries. The main insights, as well as the tools developed to reach those insights, are very general and extend to other contexts where diversity plays a role.