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Incentives in Teams

Theodore Groves
Econometrica
Vol. 41, No. 4 (Jul., 1973), pp. 617-631
Published by: Econometric Society
DOI: 10.2307/1914085
Stable URL: http://www.jstor.org/stable/1914085
Page Count: 15
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Incentives in Teams
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Abstract

This paper analyzes the problem of inducing the members of an organization to behave as if they formed a team. Considered is a conglomerate-type organization consisting of a set of semi-autonomous subunits that are coordinated by the organization's head. The head's incentive problem is to choose a set of employee compensation rules that will induce his subunit managers to communicate accurate information and take optimal decisions. The main result exhibits a particular set of compensation rules, an optimal incentive structure, that leads to team behavior. Particular attention is directed to the informational aspects of the problem. An extended example of a resource allocation model is discussed and the optimal incentive structure is interpreted in terms of prices charged by the head for resources allocated to the subunits.

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