Repeated Interaction in Teams: Tenure and Performance

Many of the activities performed in rms are done by teams, where a common output is observed but outsiders cannot observe the individual contributions of each team member. This leads to the possibility of some of the members of the team free-riding on the contributions of others. Repeated interactions of a team can then potentially lead to cooperation among the members of the team under the credible threat of returning to a free-riding equilibrium. However, repeated interaction under the e cient cooperation of a team may lead to decreasing overall output over time because the bene ts of the team working together may exogenously decrease over time. This then leads for the optimal duration of a team to be nite but stochastic, create ine ciency, but be su ciently long so that the elements of the team have an incentive to cooperate. This provides a theory of successive team formation and termination in a rm. The possibility for a too long duration for e cient team cooperation may then lead the rm to reduce the extent of team cooperation, in order to be able to reduce the expected duration of a team, and have fewer losses of the team lasting for too long. When one considers team size, it may also be optimal to reduce team size at the cost of e ciency, so that repeated interaction may possibly induce more cooperation among the team members.