7 - Team Work

Question 1

Which factors increase gains from teamwork?

Answer 1

• strong differences in skills and information between workers
• high relevance of one person’s knowledge for other workers
• low communication costs

Question 2

What does this graph show?

Answer 2

Person 4 has an absolute advantage in design & operations.

• If person 2 has a question about design, person 4 is a better resource than person 3.
• If person 3 has a question about operations, person 4 is a better resource than person 2.

A hierarchical organization, where person 4 is the supervisor to whom all go to consult, could work best.

Question 3

What does this graph show?

Answer 3

• person 2 is strong on operational but weak on design, the opposite is true for person 3.
• If person 2 (person 3) needs to think about design (operations), person 3 (person 2) is good to ask.
• Team communication seems best because each person has an absolute advantage in one of the two skills. When the design expert works with the operations expert, they produce a new product design that is better than the two individuals could have produced working independently.

Question 4

What are other advantages of teamwork?

Answer 4

• gains from specialization: workers can specialize in a narrow set of tasks, getting better and faster at these tasks (Adam Smith’s pin factory) -> specialization can reinforce skill complementarities
• nonpecuniary benefits: people might enjoy working with others because work becomes less repetitive and more fun

Question 5

What are disadvantages of teamwork?

Answer 5

• teams can be time consuming to organize & coordinate
• assessing individual performance becomes harder -> free riding can exacerbate moral hazard problems relative to independent work

Question 6

What is the free-riding problem in teams(firms)?

Answer 6

• Team member i chooses e_i to maximize :
  1/n * q − c(e_i),
  taking the other team members’ efforts as given.
• Dominant strategy: e_i = 1/n for all i
• Effort is inefficiently low because team members do not internalize the positive externality of effort on other team members. -> free riding
• The larger the team, the more severe is the free riding problem.

Question 7

How can the owner of the firm overcome the free-rider problem?

Answer 7

• Firm owner offers each team member a share s_i of the team output and a flat wage f_i.
• The firm owner sets s_i = 1 and extracts the team members’ surplus by a negative flat wage (similar to a selling-the-firm contract with one agent).
• The free riding problem is solved because the firm owner can act as a budget breaker.
• But: Such contracts are usually not feasible in practice.

Question 8

How can teams establish and enforce work norms?

Answer 8

• within the team, individual efforts are often observable ) mutual monitoring
• shirkers can be punished, e.g., by team pressure or future non-cooperation
• idea is similar to relational contracting