DP9833 | Team Production in Competitive Labor Markets with Adverse Selection

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Team production is a frequent feature of modern organizations. Combined with team incentives, team production can create externalities among workers, since their utility upon accepting a contract depends on their team?s performance and therefore on their colleagues? productivity. We study the effects of such externalities in a competitive labor market if workers have private information on their productivity. We find that in any competitive equilibrium there must be Pareto-efficient separation of workers according to their productivity. We further find that externalities facilitate equilibrium existence, where under a particular condition on workers? indifference curves even arbitrarily small externalities guarantee equilibrium existence.