Team production in endogenous networks

Determining when team production is beneficial requires understanding how a team's characteristics affect its productive capabilities. This study proposes a model of team formation and production in which the number of teams established and the characteristics of each are determined by the structure of an endogenous network and synergies between team members. The results of a laboratory experiment, which varies the costs and benefits associated with forming teams, reveal that contributions to team production are generally in line with predictions despite considerable deviations in the team formation process. Overall, there are high rates of efficiency loss in the experiment, with groups obtaining less than half of the aggregate earnings possible, on average, and it is shown that this is largely attributable to sub-optimal network (team) formation. These findings indicate that self-formed teams are unlikely to be optimally constructed.