Group Punishments without Commitment

Benjamin Tengelsen, Ariel Zetlin-Jones and Emilio Bisetti
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Benjamin Tengelsen: Carnegie Mellon University
Emilio Bisetti: Carnegie Mellon University, Tepper Schoo

No 1496, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper re-examines the importance of separation between ownership and labor in team production models that feature free riding. In models of team production subject to moral hazard, conventional wisdom suggests an outsider is needed to administer incentive schemes that do not balance the budget. We analyze the ability of insiders to to administer such incentive schemes in a dynamic setting by developing a repeated model of moral hazard in teams. In our setting, after team outcomes are observed, a benevolent planner who lacks commitment has the opportunity to impose group punishments which do not balance the budget. We extend techniques from \citet{abreu1986extremal} to characterize the entire set of subgame perfect equilibrium payoffs and find that insiders are capable of enforcing group punishments when they are sufficiently patient. When these group punishments are enforceable, they are welfare enhancing for the team of producers relative to an environment where such punishments are exogenously restricted.

Date: 2017
New Economics Papers: this item is included in nep-cdm, nep-gth and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1496

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