Incentives, Employment, and the Division of Labor in Teams
29 Pages Posted: 25 Apr 2011 Last revised: 13 May 2014
Date Written: August 2013
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: Suggested Citation