The Impact of Moral Hazard and Budget Balancing on Sorting in Partnerships

Galina Vereshchagina

No 1452, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Team production is an important contributor to economic activity and its significance has been increasing with rising degrees of specialization. Understanding how agents with heterogeneous characteristics organize in teams, and how the process of team formation can be impacted by prominent economic frictions, is an essential step in answering many empirical and policy questions. This paper argues that moral hazard, in conjunction with budget balancing (as in the classic moral-hazard-in-teams-problem in \cite{holms1}) creates incentives for the high-skilled agents to team up with the low-skilled ones. This occurs because of how the optimal contract used in the presence of moral hazard and budget balancing varies across different partnerships. As a result, organizing in heterogeneous teams allows to distort the effort of the most productive agents to a lesser degree. Numerical experiments demonstrate that this mechanism is quantitatively significant and may rule out positive sorting despite substantial degrees of complementarity in the underlying production technology. Thus, contrary to common intuition, the formation of "mixed team" does not have to be the outcome of sub-modularities in the production technology (e.g., due to learning from each other) but, instead, may be driven by the presence of moral hazard.

Date: 2017
New Economics Papers: this item is included in nep-cdm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2017/paper_1452.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1452

Access Statistics for this paper

More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().