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CESifo Working Paper Details

Team Production in Competitive Labor Markets with Adverse Selection

Ferdinand von Siemens (Website), Michael Kosfeld (Website)

CESifo Working Paper No. 4638 (February 2014)

Primary CESifo Category: [4] Labour Markets

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.

Keywords: team production, competition, adverse selection, externality

JEL Classification:
[D240] Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
[D820] Asymmetric and Private Information; Mechanism Design
[J300] Wages, Compensation, and Labor Costs: General
[L220] Firm Organization and Market Structure

Additional CESifo Category:
[11] Industrial Organisation

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