Reciprocity in Teams

Abstract

We analyze the effects of reciprocity on the performance of a two-player team working in a venture. The players initially negotiate a fair, ‘reference-point,’ contract, which determines their cash-flow rights and the direction of the venture (in terms of a project-choice). They then exert effort in running the business (hence, a potential double-sided moral hazard problem exists in the form of effort-shirking). Initially, they have empathetic feelings towards each other (positive reciprocity). However, over time, the chance to change direction (switch projects) unexpectedly arises, creating conflict between the players. The new project provides benefits for one player, but not the other. A change of project destroys empathy, and may lead to retaliation (negative reciprocity). Positive and negative reciprocity may combine to prevent project-switching, mitigate effort-shirking, and enhance venture performance.

Keywords: Teamwork, Double-Sided Effort-Shirking, Project Conflicts, Positive Reciprocity, Empathy, Negative Reciprocity, Retaliation

JEL Classification: C7, D8, D63, L2