Team Signaling and Collective Reputation with an Application to the Optimal Sharing Rule

Abstract

This paper extends the team production theory pioneered by Holmstrom (1982) with a team signaling model. In the model, the team's output acts as a signal of the team's ability, and thus is valuable for the team members. The team members will cooperate to some extent to signal a speci…fic type, which alleviate the shirking problem. The enforcement mechanism is revealed: the rent from the signaling is to subsidize the team production, which in effect transforms the prisoners' dilemma game into a coordination game which is shaped by the sharing rule. The optimal sharing rule is determined by the trade-off between reputational rents and incentive distortion.

Keywords: Team production, signaling, collective reputation

JEL Classification: D820, D860, L220