DP9833 Team Production in Competitive Labor Markets with Adverse Selection

Author(s): Michael Kosfeld, Ferdinand Von Siemens
Publication Date: February 2014
Keyword(s): adverse selection, competition, externality, team production
JEL(s): D24, D82, J30, L22
Programme Areas: Labour Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9833

Team production is a frequent feature of modern organizations. Combined with team incentives, team production can create externalities among workers, since their utility upon accepting a contract depends on their team’s performance and therefore on their colleagues’ productivity. We study the effects of such externalities in a competitive labor market if workers have private information on their productivity. We find that in any competitive equilibrium there must be Pareto-efficient separation of workers according to their productivity. We further find that externalities facilitate equilibrium existence, where under a particular condition on workers’ indifference curves even arbitrarily small externalities guarantee equilibrium existence.