Preventing Bottlenecks in Organizations

Abstract

Organizations may suffer from unforeseen negative shocks, potentially leading to severe bottlenecks. This paper studies an optimal incentive scheme robust to those shocks in the effort induction problem in team production. The optimal scheme under the no-shock assumption is typically vulnerable in that a single shock can lead to shirking of sizable non-shocked members. We show that an optimal scheme is associated with a uniform order of worker subsets; and identify relative complementarity as a novel source of the determinant of the optimal organization structure.