You, Me, or We? Equilibrium Operating Modes in Co-Production

Abstract

Teamwork is central to many organizations, especially in knowledge-intensive and service industries. Yet, the reality of many teams is that not everyone contributes equally. Often one person single-handedly carries out a project's execution because it is more efficient or, alternatively, due to interpersonal dynamics. To disentangle these two effects we consider a stylized principal-agent model of co-production and characterize the equilibrium operating modes when the principal chooses ex-ante how output is to be split. The principal and the agent may have different costs of effort (capabilities) and incentives (as set by the principal). Their efforts can be complementary or substitutable and participation in the project is voluntary. We find that, due to double moral hazard and the principal's desire to capture value, the principal works alone too often and that small changes in effort coupling may lead to abrupt changes in incentive structure and operating modes. Our stylized model explains why managers tend to micro-manage or under-delegate, why different phases of a project might involve different leadership styles, and how advances in technology can radically transform service delivery.