Reputation deals: A theory of endogenous teams

This paper complements the traditional theory of teams [Fama, 1980; Holmstrom, 1982a, 1982b] by introducing endogenous team formation by agents who are concerned with their reputations and are informed about the types of their potential teammates. Such a constellation leads to a tradeoff between joining a high-productivity type but a low-reputation partner. Gains from trade are analyzed, both, for the case of non-transferable and transferable utility, and the lessons are discussed that can be learned from observing reputation deals. Finally a signaling model of teaming is developed that captures in a fully rational way the process of information acquisition by the agents' strategic opponent: the market.