Team Design under Moral Hazard

Abstract

This paper studies team design under moral hazard in an economy in which agents have heterogeneous technologies that differ in how they shift probability mass across states of nature when an agent exerts effort. The principal chooses which types of agents to include in the team and offers each agent a contract to induce effort. This team design problem gives rise to endogenous interactions between agents' technologies in a team in the absence of complementarities in the production technology. I characterize optimal team design and show that homogeneous and heterogeneous teams in terms of agents' technologies arise endogenously. In addition, the principal may be biased to hire an inefficiently small team. The results have implications for the heterogeneity of agents in teams, the contracts they receive, and the size and boundaries of teams.

Keywords: Moral hazard, teams, heterogeneous agents.

JEL Classification: D21, D82, D86, L23.