Moral Hazard in Remote Teams

Abstract

We re-examine the ability of teams to credibly self-impose group punishments and
prevent free-riding when individual inputs are unobservable. Holmström (1982) shows
that group punishments are not credible in static games. We formulate self-imposed
group punishments as performance under-reporting by the team, and we ask whether
the team can credibly under-report in a repeated game. We develop simple strategies
that sustain under-reporting, and show that the threat of under-reporting improves welfare
only if team members’ preferences between shirking and team output consumption
are non-separable. Our results suggest that self-assessments can replace increased managerial
monitoring and mitigate free-riding in remote work environments.

Keywords: Team Production, Work from Home, Limited Commitment, Repeated Game

JEL Classification: C72, C73, D43, D82