Individual Accountability in Teams

We consider a team production problem in which the principal observes only the team output and not individual effort. As is well known, inefficiencies may arise when each team member’s compensation is based only on his individual action, so that team members are not penalized or rewarded as a group, as is often the case in practice. We show that it is possible to overcome this problem by specifying in the agents’ job assignments that each member should work hard in the joint production as well as monitor and report the actions of his teammates. We show that even though equilibrium job assignments include monitoring, this serves only to provide incentives for effort–agents do not engage in wasteful monitoring in equilibrium. It is remarkable that the first-best is achieved in equilibrium (high effort and no monitoring) even though it cannot be achieved if the principal assigns high effort and no monitoring. In other words, the first-best can only be achieved by assigning second-best actions.