Paper #261

Title:

How competition controls team production: The case of fishing firms

Authors:

Benito Arruñada and Manuel González

Date:

November 1997

Abstract:

Under team production, those who monitor individual productivity are usually the only ones compensated with a residual that varies with the performance of the team. This pattern is efficient, as is shown by the prevalence of conventional firms, except for small teams and when specialized monitoring is ineffective. Profit sharing in repeated team production induces all team members to take disciplinary action against underperformers through switching and separation decisions, however. Such action provides effective self-enforcemnt when the markets for team members are competitive, even for large teams using specialized monitoring. The traditional share system of fishing firms shows that for this competition to provide powerful enough incentives the costs of switching teams and measuring team productivity must be bellow. Risk allocation may constrain the organizational design defined by the use of a share system. It does not account for its existence, however.

Keywords:

Theory of the firm, team production, share contracts, profit sharing, remuneration systems, self-enforcement, fishing firms

JEL codes:

J33, J41, L14, L20, Q22

Area of Research:

Business Economics and Industrial Organization

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