Abstract:

We use a mechanism–design approach to study a team whose members choose a joint project and exert individual efforts to execute it. Members have private information about the qualities of alternative projects. Information sharing is obstructed by a trade–off between adaptation and motivation. We determine the conditions under which first–best project and effort choices are implementable and show that these conditions can become relaxed as the team grows in size. This contrasts with the common argument (based on free–riding) that efficiency is harder to achieve in larger teams. We also characterize the second–best mechanism and find that decision–making may be biased either in favor or against the team’s initially preferred alternative.