Incentives, Employment, and the Division of Labor in Teams

29 Pages Posted: 25 Apr 2011 Last revised: 13 May 2014

See all articles by Michael T. Rauh

Michael T. Rauh

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: August 2013

Abstract

We develop a theory of incentives, wages, and employment in the context of team production. A central insight is that specialization and division of labor not only improve productivity but also increase effort and the sensitivity of effort to incentives under moral hazard. We show that incentives and employment are complements for the principal when the positive effects of specialization and division of labor outweigh the negative effects of increased idiosyncratic risk and are substitutes otherwise. We provide new characterizations of the partnership, the firm, and the role of the budget-breaker that are quite different from the classical literature.

Keywords: budget-breaker, division of labor, endogenous team size, incentives, moral hazard, partnerships, size-wage effect, specialization, teams, theory of the firm

JEL Classification: D02, D21, D86, L25, M5

Suggested Citation

Rauh, Michael T., Incentives, Employment, and the Division of Labor in Teams (August 2013). Available at SSRN: https://ssrn.com/abstract=1819808 or http://dx.doi.org/10.2139/ssrn.1819808

Michael T. Rauh (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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