Project Characteristics, Incentives and Team Production

34 Pages Posted: 21 Nov 2014  

Richard Fu

University of Alabama at Birmingham - School of Business

Ajay Subramanian

Georgia State University

Anand Venkateswaran

Northeastern University - Finance and Insurance Area

Date Written: November 19, 2014

Abstract

We develop a model to show how agency conflicts, free rider effects and monitoring costs interact to affect optimal team size and workers' incentive contracts. Team size increases with project risk, decreases with profitability, and decreases with monitoring costs as a proportion of output. Our predictions are consistent with empirical evidence that firm-specific risk has increased over time and average corporate earnings have declined, while firms' organizational structures have also flattened. The predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology that are likely to lower monitoring costs lead to larger teams. Further, firms with relatively more intangible assets, where monitoring costs are likely to be higher, are smaller. Optimal incentive intensities decrease with risk and increase with profitability. The endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives.

Keywords: Teams, Incentives, Moral Hazard, Monitoring, Contracting, Production

JEL Classification: L22, L14, D21, D82, M11

Suggested Citation

Fu, Richard and Subramanian, Ajay and Venkateswaran, Anand, Project Characteristics, Incentives and Team Production (November 19, 2014). Forthcoming in Management Science; Northeastern U. D’Amore-McKim School of Business Research Paper No. 2527952. Available at SSRN: https://ssrn.com/abstract=2527952

Richard Fu

University of Alabama at Birmingham - School of Business ( email )

United States

Ajay Subramanian (Contact Author)

Georgia State University ( email )

Depts. of Finance & Risk Management and Insurance
P.O. Box 4050
Atlanta, GA 30303
United States
404-413-7483 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/ajay-subramanian/

Anand Venkateswaran

Northeastern University - Finance and Insurance Area ( email )

Boston, MA 02115
United States

Paper statistics

Downloads
95
Rank
230,733
Abstract Views
427