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Moral Hazard in Teams Revisited

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ICM Millennium Lectures on Games

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Summary

This paper addresses the classic free riding question in a two-person managerial team Unlike pure moral hazard models, we assume that individual entrepreneurial abilitie also affects team output. Using a two-period model, we show that in an Alchian-Demsetz firm, even in a finite period game setting, effort levels of both team members higher than commonly perceived can be achieved. We argue that this is due to partial mutual observability between the team members. We then show that the existence of a self-enforcing mechanism in managerial teams alleviates free riding, and this is one reason why team structures persist. Comparison with classic capitalistic firms where group performance evaluation is abandoned yields the result that the optimal incentive piece rate should be lower in a team. This may explain the Jensen-Murphy puzzle.

I thank Greg LeBlanc, Karine Gobert for their comments and discussions on this research however, all remaining errors are mine.

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Author information

Authors and Affiliations

  1. Department of Economics, Concordia University, Montréal, Québec, H3G 1M8, Canada

    Baomin Dong

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  1. Baomin Dong
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Editors and Affiliations

  1. Faculty of Applied Mathematics & Controll Processes Petrodyvorets, St. Petersburg State University, 198904, St. Petersburg, Russian Federation

    Leon A. Petrosyan

  2. Centre of Game Theory, Hong Kong Baptist University, Kowloon Tong, Hong Kong, PR China

    David W. K. Yeung

  3. Centre of Game Theory, St. Petersburg State University Petrodyvorets, 198904, St. Petersburg, Russian Federation

    David W. K. Yeung

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© 2003 Springer-Verlag Berlin Heidelberg

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Dong, B. (2003). Moral Hazard in Teams Revisited. In: Petrosyan, L.A., Yeung, D.W.K. (eds) ICM Millennium Lectures on Games. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-05219-8_3

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  • DOI: https://doi.org/10.1007/978-3-662-05219-8_3

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-05618-5

  • Online ISBN: 978-3-662-05219-8

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