Team selection: Factor pricing with discrete and inhomogeneous factors

Abstract

Abstract Imagine an entrepreneur who has the opportunity of selecting a team T from a set of persons N for a common enterprise. Every potential team member i requires a reward a i for joining the team, every team makes a joint profit V ( T ). The entrepreneur chooses that team which leaves the largest surplus V ( T ) − Σ i ∈ T a i to her/him. A subgame-perfect equilibrium of this two-stage game always exists. Under certain minimal assumptions about equilibrium selection, every equilibrium is efficient. The set of equilibria is larger than the core of V . Although there are often many equilibria, the set of ‘important’ team members is unique: only those who are included in all efficient teams (which maximize V ) have the chance to get a positive reward. For many simple examples where the core is empty, the equilibrium is unique. If V is a neoclassical production function the unique equilibrium rewards are the marginal productivities of the factors, i.e. the neoclassical distribution theory is confirmed. Team selection is discussed also under the point of view of Common Agency.