Inefficiencies in a Model of Team Formation

We consider a two period model with complete information involving three agents, two on one side of the market, and one on the other. The agents on the same side of the market bargain, among themselves, over whether to form a team or not, and also with the other agent, either singly or as a team, regarding the payoffs. We characterize the subgame perfect Nash equilibrium of this game. We find that the behavioral assumptions regarding the agents play a critical role in the outcome. If the agents are combative then the outcome is efficient. Whereas if the agents are peace loving, and the discount factor is large, then the outcome may involve delay, as well as (inefficient) team formation.