Organizations & Markets

We study optimal workforce and contract design for a firm that employs a team of two agents. The agents have possibly diverse demographic characteristics captured by their discount factors. We also study optimal team design for four agents with given discount factors—two with low discount factors and two with high discount factors—who are to be assigned to two teams and identify conditions under which diverse assignment is optimal.

An emerging body of research on teams highlights the importance of implicit incentives that rely on mutual monitoring among team members. While prior research on mutual monitoring in team production settings assumes agents have identical abilities, this paper considers teams with productively heterogeneous agents. In cross-functional teams, productive heterogeneity does not alter the qualitative nature of incentives.