Peer enforcement in teams: evidence from high-skill professional workers with repeated interactions

Firms often organize employees into teams. Economists posit that firms organize workers into teams to take advantage of complementarities, increasing the productivity and output of teams beyond that of individual workers. Organizing workers into teams also generates problems. Holmstrom (1982) showed that groups of workers with inter-related productive inputs generate a moral hazard problem in the form of an incentive for some team members to supply less effort, or shirk. Successful teams exploit complementarities and reduce the incentive for individual workers to shirk. The incentive to shirk in teams can be mitigated in several ways. Che and Yoo (2001) analyzed incentives in teams when the team members repeatedly interact and observe the behavior of others. Their model shows that compensation schemes rewarding an employee when co- workers perform well, and punishing when co-workers perform poorly, have desirable properties under repeated teammate interaction. Ishida (2006) generalizes this model to address relative, not absolute, compensation and generates similar predictions. The key feature in these models is the existence of sanctions imposed by team members for past behavior that can reduce shirking.