Faculty of Economics and Business Administration Publications Database

Team Production in Competitive Labor Markets with Adverse Selection

Volume: 68
Pages: 181 - 198
Month: May
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2014
Keywords: Team production; Competition; Adverse selection; Externality

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.