Internal Competition for Corporate Resources and Incentives in Teams

Invoking the free-rider problem in teams, many observers find profit sharing in large organizations puzzling, because it should have negligible incentive effects. We show that if a firm can be decomposed into two separate teams whose outputs can be observed, then profit sharing combined with competi...

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Bibliographic Details
Published in:The Rand journal of economics 2004, Vol.35 (4), p.710-727
Main Authors: Marino, Anthony M., Zábojník, Ján
Format: Article
Language:English
Subjects:
Analysis
Business structures
Compensation management
Competition
Economic competition
Economic models
Economic resources
Economics
Economies of scale
Enterprises
Financial budgets
Free rider effect
Lobbying
Organizational behavior
Organizational structure
Production functions
Profit sharing
Profit sharing plans
Studies
Teams
Teamwork
Total surplus
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Summary:Invoking the free-rider problem in teams, many observers find profit sharing in large organizations puzzling, because it should have negligible incentive effects. We show that if a firm can be decomposed into two separate teams whose outputs can be observed, then profit sharing combined with competition between these two teams for internal resources frequently solves the free-rider problem. Using this result, we endogenize the firm's organizational structure and show that in the presence of economies of scale, small firms tend to organize as unitary firms, while large firms choose the multidivisional organizational form.
ISSN:0741-6261
1756-2171
DOI:10.2307/1593769