Optimal Team Size and Monitoring in Organizations

40 Pages Posted: 1 Mar 2007

See all articles by Pierre Jinghong Liang

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University; CAFR/SAIF

Madhav V. Rajan

Booth School of Business, University of Chicago

Korok Ray

University of Chicago GSB

Date Written: August 2007

Abstract

We formulate and analyze a model of team structure and monitoring within a LEN agency framework. We incorporate three key instruments in the internal design of an organization involving team production: team size, monitoring activities, and incentive contracts. We show that the complex trade-offs among these instruments lead to surprisingly simple implications. One such result is that the equilibrium level of pay-for-performance for workers is attenuated, and is at times invariant to most environmental variables of interest. As such, our model helps explain the empirical puzzle of the lack of a tradeoff for risk/incentives shown in standard agency models. Our work also demonstrates the presence of complementarities between team size and monitoring, and between worker talent and managerial monitoring ability. Finally, we derive predictions about the impact of environmental variables on the choice of optimal team size, incentives and employee quality, even in the presence of an external marketplace for talent.

Keywords: teams, incentives, contracts, monitoring

Suggested Citation

Liang, Pierre Jinghong and Rajan, Madhav V. and Ray, Korok, Optimal Team Size and Monitoring in Organizations (August 2007). Available at SSRN: https://ssrn.com/abstract=965950 or http://dx.doi.org/10.2139/ssrn.965950

Pierre Jinghong Liang (Contact Author)

Tepper School of Business, Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-3315 (Phone)
412-268-6837 (Fax)

HOME PAGE: http://www2.tepper.cmu.edu/andrew/liangj

CAFR/SAIF ( email )

1954 Huashan Road
Shanghai P.R.China, 200030
China

Madhav V. Rajan

Booth School of Business, University of Chicago

1101 East 58th Street
Chicago, IL 60637-1561
United States

Korok Ray

University of Chicago GSB ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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