The Formation of Multiple Teams

Abstract

Organizational forms such as task-oriented teams have often been proposed as a method to enhance the efficiency of a firm. Under asymmetric information, however, the costs of acquiring the information needed to improve efficiency may outweigh the efficiency gains and lead to lower profits. We illustrate this idea by considering a profit-maximizing principal who needs to allocate a group of agents among a number of projects, given that the principal has incomplete information about the agents' abilities. We study feasible incentive-compatible (truth-revealing) individually rational mechanisms under both the dominant strategy and Bayesian Nash behavioral assumptions. Some attention is also paid to Nash equilibrium mechanisms. The paper covers derivation of optimal mechanisms, efficiency analysis, and analysis of the principal's expected profit as a function of different types of environment and information structures. We find that if the principal has little or no information about the agents' private characteristics and the agents follow dominant strategy behavior, the principal may often run into losses in an attempt to discover the hidden information. Paradoxically, the loss occurs when the efficiency gains from team production are high and the competition among the agents is low. If the hidden information about each agent can be summarized as a one-dimensional type parameter, and if a prior distribution function of the agents ' types is common knowledge among the agents and the principal, an expected-profit maximizing Bayesian equilibrium mechanism exists and is of the optimal auction form (Myerson, 1 98 1 ) . Moreover, the mechanism can be equivalently implemented in dominant strategies with no expected profit loss for the principal. Yet, the principal's profit often decreases with an increase in the number of projects. These findings suggest that, in profit-maximizing firms with low competition among the employees, efficient organizational forms may often be foregone in favor of profits.

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