Intergroup competition with an endogenously determined prize level

To mitigate free-rider problems in teamwork, this paper uses laboratory experiments to test a mechanism in which a firm creates a competitive environment for its two teams by awarding a prize based on the aggregate output produced by these two teams. The experimental results support the prediction that the proposed mechanism encourages a greater number of team members to make costly contributions. In the experimental protocol with random matching of team members across decision periods, team members are found to over-contribute relative to the theoretical prediction. This result is linked to team members’ beliefs that their team has lower contributions than the competing team. In contrast, with a fixed matching protocol, team members’ over-contributing is linked to conditional cooperation, based on their beliefs about the contributions of other team members.