Strategic Incentives in Teams: Implications of Returns to Scale

This article demonstrates the critical relationship between the characteristics of the production function and the strategic incentives in a team. Equilibrium effort increases in team size when substitutability is low relative to returns to scale. Effort levels are actually strategic complements when returns to scale exceed the substitutability of members' effort. Moreover, even with equal shares the well‐known problem is determined by returns to scale and becomes worse as returns increase. While a target scheme can support the optimal output level as an equilibrium, it does not completely deter free riding. A team member will accommodate shirking by increasing their own effort within a remarkably large “accommodation zone” where the additional effort cost is less than the bonus. This accommodation of shirking by others exists for different returns to scale and even for very low levels of substitutability.