Internal Competition for Corporate Resources and Incentives in Teams

Citations Over TimeTop 10% of 2004 papers

Abstract

Invoking thefree-rider problem in teams, many observersfind profit sharing in large organizations puzzling, because it should have negligible incentive effects. We show that $a firm can be decomposed into two separate teams whose outputs can be observed, thenprofit sharing combined with competition between these two teamsfor internal resourcesfrequently solves thefree-rider problem. Using this result, we endogenize thefirm's organizational structure and show that in the presence of economies of scale, small firms tend to organize as unita~y firms, while largefirms choose the multidivisional organizationalform.

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