Optimal Team Composition: Diversity to Foster Mutual Monitoring
38 Pages Posted: 25 Mar 2019
Date Written: February 1, 2019
We study optimal team design. In our model, a principal assigns either heterogeneous agents to a team (a diverse team) or homogenous agents to a team (a specialized team) to perform repeated team production. We assume that specialized teams exhibit a productive substitutability (e.g., interchangeable efforts with decreasing returns to total effort), whereas diverse teams exhibit a productive complementarity (e.g., cross-functional teams). Diverse teams have an inherent advantage in fostering implicit/relational incentives for working that team members can provide to each other through mutual monitoring. In contrast, specialization both complicates the provision of incentives for mutual monitoring (for short expected career horizons) and creates an opportunity for tacit collusion (for long expected horizons). We use our results to develop empirical implications about the association between team tenure and team composition, pay-for-performance sensitivity, and team culture.
Keywords: team composition, assignment problem, mutual monitoring, collusion, team diversity
JEL Classification: C70, D21, D82, M55
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