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Incentives, Wages, Employment, and the Division of Labor in Teams

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  • Michael T. Rauh

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

We develop a theory of incentives, wages, and employment in the context of team production. A central insight is that specialization and division of labor not only improve productivity but also increase e ort and the sensitivity of e ort to incentives under moral hazard. We show that incentives and employment are complements for the principal when the positive e ects of specialization and division of labor outweigh the negative e ects of increased idiosyncratic risk and are substitutes otherwise. We provide new characterizations of the partnership, the rm, and the role of the budget-breaker that are quite di erent from the classical literature.

Suggested Citation

  • Michael T. Rauh, 2013. "Incentives, Wages, Employment, and the Division of Labor in Teams," Working Papers 2013-16, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    • Handle: RePEc:iuk:wpaper:2013-16
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    References listed on IDEAS

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    Cited by:

    1. Amit Jain & Will Mitchell, 2022. "Specialization as a double‐edged sword: The relationship of scientist specialization with R&D productivity and impact following collaborator change," Strategic Management Journal, Wiley Blackwell, vol. 43(5), pages 986-1024, May.
    2. Ozdenoren, Emre & Rubanov, Oleg, 2022. "Profit Sharing and Incentives," International Journal of Industrial Organization, Elsevier, vol. 83(C).
    3. Michael T. Rauh, 2020. "The Neoclassical Firm Under Moral Hazard," Journal of Industrial Economics, Wiley Blackwell, vol. 68(2), pages 191-225, June.
    4. Michael T. Rauh, 2018. "The O‐ring theory of the firm," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(1), pages 82-101, March.

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    More about this item

    Keywords

    budget-breaker; division of labor; employment; endogenous team size; incentives; partnerships; size-wage di erential; specialization; teams; wages;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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