Optimal Team Composition: : Diversity to Foster Implicit Team Incentives
Pages 5800 - 5820
Abstract
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 desirable implicit/relational incentives that team members can provide to each other (tacit cooperation). In contrast, specialization both complicates the provision of cooperative incentives by altering the punishment agents can impose on each other for short expected career horizons and fosters undesirable implicit incentives (tacit collusion) for long expected horizons. As a result, expected compensation is first decreasing and then increasing in the discount factor for specialized teams, while expected compensation is always decreasing in the discount factor for diverse teams. We use our results to develop empirical implications about the association between team tenure and team composition, pay-for-performance sensitivity, and team culture.
This paper was accepted by Brian Bushee, accounting.
References
[1]
Abreu D, Milgrom P, Pearce D (1991) Information and timing in repeated partnerships. Econometrica 59(6):1713–1733.
[2]
Abreu D, Pearce D, Stacchetti E (1986) Optimal cartel equilibria with imperfect monitoring. J. Econom. Theory 39(1):251–269.
[3]
Abreu D, Pearce D, Stacchetti E (1990) Toward a theory of discounted repeated games with imperfect monitoring. Econometrica 58(5):1041–1063.
[4]
Alchian AA, Demsetz H (1972) Production, information costs, and economic organization. Amer. Econom. Rev. 62(5):777–795.
[5]
Amaldoss W, Staelin R (2010) Cross-function and same-function alliances: How does alliance structure affect the behavior of partnering firms? Management Sci. 56(2):302–317.
[6]
Arya A, Fellingham J, Glover J (1997) Teams, repeated tasks, and implicit incentives. J. Accounting Econom. 23(1):7–30.
[7]
Arya A, Mittendorf B (2006) Using optional job-rotation programs to gauge on-the-job learning. J. Inst. Theor. Econom. 162:505–515.
[8]
Baldenius T, Glover J, Xue H (2016) Relational contracts with and between agents. Arya A, Fellingham J, Glover J (1997) Teams, repeated tasks, and implicit incentives. J. Accounting Econom. 23(1):7–30.
[9]
Baliga S, Sjostrom T (1998) Decentralization and collusion. J. Econom. Theory 83(2):196–232.
[10]
Barak MEM (2016) Managing Diversity: Toward a Globally Inclusive Workplace (Sage Publications, Thousand Oaks, CA).
[11]
Barker J (1993) Tightening the iron cage: Concertive control in self-managed teams. Admin. Sci. Quart. 38(3):408–437.
[12]
Becker G (1973) A theory of marriage: Part 1. J. Political Econom. 81(4):813–846.
[13]
Bertomeu J, Liang PJ (2014) Disclosure policy and industry fluctuations. Management Sci. 61(6):1292–1305.
[14]
Campion MA, Cheraskin L, Stevens MJ (1994) Career-related antecedents and outcomes of job rotation. Acad. Management J. 37(6):1518–1542.
[15]
Che YK, Yoo SW (2001) Optimal incentives for teams. Amer. Econom. Rev. 91(3):525–541.
[16]
Chen H, Lim N (2013) Should managers use team-based contests? Management Sci. 59(12):2823–2836.
[17]
Cohen SG, Bailey DE (1997) What makes teams work: Group effectiveness research from the shop floor to the executive suite. J. Management 23(3):239–290.
[18]
Deloitte (2017) A transparent look at the work of the board. Board Practices Report, Society for Corporate Governance and Deloitte Development LLC, New York.
[19]
Demski JS, Sappington D (1984) Optimal incentive contracts with multiple agents. J. Econom. Theory 33(1):152–171.
[20]
Fong YF, Li J (2017) Information revelation in relational contracts. Rev. Econom. Stud. 84:277–299.
[21]
Gibson C, Vermeulen F (2003) A healthy divide: Subgroups as a stimulus for team learning behavior. Admin. Sci. Quart. 48(2):202–239.
[22]
Glover J (2012) Explicit and implicit incentives for multiple agents. Foundations Trends® Accounting 7(1):1–71.
[23]
Glover J, Kim E (2020) Teams, career horizon diversity, and tacit collusion. Working paper, Columbia Business School, Columbia University, New York.
[24]
Glover J, Xue H (2020) Team incentives with non-verifiable performance measures: A multi-period foundation for bonus pools. Accounting Rev. 95(6):181–212.
[25]
Green EJ, Porter RH (1984) Noncooperative collusion under imperfect price information. Econometrica 52(1):87–100.
[26]
Guay WR, Kepler JD, Tsui D (2019) The role of executive cash bonuses in providing individual and team incentives. J. Financial Econom. 133(2):441–471.
[27]
Guimera R, Uzzi B, Spiro J, Amaral LA (2005) Team assembly mechanisms determine collaboration network structure and team performance. Science 308(5722):697–702.
[28]
Halac M, Lipnowski E, Rappoport D (2020) Rank uncertainty in organizations. Working paper, Yale University, New Haven, CT.
[29]
Hamilton BH, Nickerson JA, Owan H (2003) Team incentives and worker heterogeneity: An empirical analysis of the impact of teams on productivity and participation. J. Political Econom. 111(3):465–497.
[30]
Hamilton BH, Nickerson JA, Owan H (2012) Diversity and productivity in production teams. Kauhanen, ed. Advances in the Economic Analysis of Participatory and Labor-Managed Firms (Emerald Group Publishing Limited, Bingley, UK), 99–138.
[31]
Hemmer T (1995) On the interrelation between production technology, job design, and incentives. J. Accounting Econom. 19(2–3):209–245.
[32]
Hoegl M, Weinkauf K, Gemuenden H (2004) Interteam coordination, project commitment, and teamwork in multiteam R&D projects: A longitudinal study. Organ. Sci. 15(1):38–55.
[33]
Holmstrom B (1982) Moral hazard in teams. Bell J. Econom. 13(2):324–340.
[34]
Holmstrom B, Milgrom P (1991) Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design. J. Law Econom. Organ. 7:24–52.
[35]
Hoogendoorn S, Oosterbeek H, Van Praag M (2013) The impact of gender diversity on the performance of business teams: Evidence from a field experiment. Management Sci. 59(7):1514–1528.
[36]
IBM Analytics (2016) Data science is a team sport. Do you have the skills to be a team player? Report, IBM Analytics, Somers, NY.
[37]
International Auditing and Assurance Standards Board (IAASB) (2014) A framework for audit quality: Key elements that create an environment for audit quality. Report, IAASB, New York.
[38]
Ishiguro S (2004) Collusion and discrimination in organizations. J. Econom. Theory 116(2):357–369.
[39]
Ishihara A (2017) Relational contracting and endogenous formation of teamwork. RAND J. Econom. 48(2):335–357.
[40]
Itoh H (1991) Incentives to help in multi-agent situations. Econometrica 59(3):611–636.
[41]
Itoh H (1992) Cooperation in hierarchical organizations: An incentive perspective. J. Law Econom. Organ. 8:321–345.
[42]
Itoh H (1993) Coalitions, incentives, and risk sharing. J. Econom. Theory 60(2):410–427.
[43]
Kaya A, Vereshchagina G (2014) Partnerships versus corporations: Moral hazard, sorting, and ownership structure. Amer. Econom. Rev. 104(1):291–307.
[44]
Knez M, Simester D (2001) Firm-wide incentives and mutual monitoring at Continental Airlines. J. Labor Econom. 19(4):743–772.
[45]
Kreps D (1996) Corporate culture and economic theory. Buckley PJ, Michie J, eds. Firms, Organizations and Contracts: A Reader in Industrial Organization , Oxford Management Readers (Oxford University Press, Oxford, UK), 221–275.
[46]
Kvaloy O, Olsen T (2006) Team incentives in relational employment contracts. J. Labor Econom. 24(1):139–169.
[47]
Lazear E (1999) Globalisation and the market for teammates. Econom. J. 109(4):15–40.
[48]
Li C (2018) Are top management teams compensated as teams? A structural estimation approach. Working paper, City University of New York, New York.
[49]
Loucks J, Davenport T, Schatsky D (2018) State of AI in the enterprise, 2nd ed. Report, Dolitee Development LLC, New York.
[50]
Milgrom P, Roberts J (1992) Economics, Organization and Management (Prentice Hall, Upper Saddle River, NJ).
[51]
Milgrom P, Roberts J (1995) Complementarities and fit strategy, structure, and organizational change in manufacturing. J. Accounting Econom. 19(2–3):179–208.
[52]
Miller T, Triana M (2009) Demographic diversity in the boardroom: Mediators of the board diversity–firm performance relationship. J. Management Stud. 46(5):755–786.
[53]
Milliken F, Martins L (1996) Searching for common threads: Understanding the multiple effects of diversity in organizational groups. Acad. Management Rev. 21(2):402–433.
[54]
Mukherjee A, Vasconcelos L (2011) Optimal job design in the presence of implicit contracts. RAND J. Econom. 42(1):44–69.
[55]
Murtha B, Challagalla G, Kohli A (2011) The threat from within: Account managers’ concern about opportunism by their own team members. Management Sci. 57(9):1580–1593.
[56]
Nathan M, Lee N (2013) Cultural diversity, innovation, and entrepreneurship: Firm-level evidence from London. Econom. Geography 89(4):367–394.
[57]
Phillips K, Liljenquist K, Neale M (2009) Is the pain worth the gain? The advantages and liabilities of agreeing with socially distinct newcomers. Personality Soc. Psych. Bull. 35(3):336–350.
[58]
Porter RH (1983) Optimal cartel trigger price strategies. J. Econom. Theory 29(2):313–338.
[59]
Porter RH (2005) Detecting collusion. Rev. Indust. Organ. 26:147–167.
[60]
Reiter-Palmon R, Wigert B, de Vreede T (2012) Team creativity and innovation: The effect of group composition, social processes, and cognition. Mumford M, ed. Handbook of Organizational Creativity (Academic Press, London), 295–326.
[61]
Sannikov Y, Skrzypacz A (2007) Impossibility of collusion under imperfect monitoring with flexible production. Amer. Econom. Rev. 97(5):1794–1823.
[62]
Schwab A, Miner A (2008) Learning in hybrid-project systems: The effects of project performance on repeated collaboration. Acad. Management J. 51(6):1117–1149.
[63]
Siemsen E, Balasubramanian S, Roth A (2007) Incentives that induce task-related effort, helping, and knowledge sharing in workgroups. Management Sci. 53(10):1533–1550.
[64]
Slivinski A (2002) Team incentives and organizational form. J. Public Econom. Theory 4(2):185–206.
[65]
Taylor A, Greve HR (2006) Superman or the fantastic four? Knowledge combination and experience in innovative teams. Acad. Management J. 49(4):723–740.
[66]
Towry KL (2003) Control in a teamwork environment—The impact of social ties on the effectiveness of mutual monitoring contracts. Accounting Rev. 78(4):1069–1095.
[67]
Williams KY, O’Reilly CA III (1998) Demography and diversity in organizations: A review of 40 years of research. Res. Organ. Behav. 20:77–140.
[68]
Winter E (2004) Incentives and discrimination. Amer. Econom. Rev. 94(3):764–773.
[69]
Zenger T, Lawrence B (1989) Organizational demography: The differential effects of age and tenure distributions on technical communication. Acad. Management J. 32(2):353–376.
Index Terms
- Optimal Team Composition: Diversity to Foster Implicit Team Incentives
Index terms have been assigned to the content through auto-classification.
Recommendations
Detecting multiple seller collusive shill bidding
Highlights- This is the first paper to examine the scenario of multiple colluding sellers engaging in shill bidding.
AbstractShill bidding occurs when fake bids are introduced into an auction on the seller’s behalf in to artificially inflate the final price. The seller either has associates bid in the seller’s auctions, or the seller controls multiple fake ...
Should we collude? Analyzing the benefits of bidder cooperation in online group-buying auctions
Cooperation among bidders in traditional auctions is typically forbidden. This is because it is viewed as being harmful to the interests of sellers, who hope to obtain fair prices for their sale items. It also may be harmful to other bidders who are not ...
Low-Revenue Equilibria in Simultaneous Ascending-Bid Auctions
Low-revenue equilibria allow participants in an auction to obtain goods at prices lower than would prevail in a competitive market. These outcomes are generated as perfect equilibria of ascending-bid, multiunit auctions. We show that these equilibria ...
Comments
Information & Contributors
Information
Published In
Copyright © 2021, INFORMS.
Publisher
INFORMS
Linthicum, MD, United States
Publication History
Published: 01 September 2021
Accepted: 22 June 2020
Received: 28 February 2019
Author Tags
Qualifiers
- Research-article
Contributors
Other Metrics
Bibliometrics & Citations
Bibliometrics
Article Metrics
- 0Total Citations
- 0Total Downloads
- Downloads (Last 12 months)0
- Downloads (Last 6 weeks)0
Reflects downloads up to 24 Jan 2025