The optimal assortativity of teams inside the firm

Abstract

How does a profit-maximizing manager form teams and compensate workers when workers have private information about their productivity and exert hidden effort once in a team? We study a team-production model in which positive assortative matching is both efficient and profitmaximizing under pure adverse selection and pure moral hazard. We show that the interaction of adverse selection and moral hazard can lead to nonassortative matching if complementarities are sufficiently weak. When this is the case, the manager may prefer to delegate matching, allowing workers to sort themselves into teams.