You, Me, or We? Co-Productive Principal-Agent Dynamics (Revision 2 )

Problem Definition: Projects are often initiated by a single person|a principal|who then decides whether to execute it on their own (Single Execution) or to partner with someone else|an agent. If an agent is hired, the project execution may be joint (Joint Execution) or undertaken only by the agent (Delegated Execution). How do the resulting co-productive dynamics compare to what would be optimal to do? Methodology/Results: The authors consider a co-productive principal-agent model with endogenous team formation. With financial transfers, as is typical in inter-organizational contexts, joint execution happens less frequently than optimally. Moreover, the optimal contract under joint execution turns out to be a 50%-50% equity split under mild conditions. When financial transfers are not allowed, as is typical in intra-organizational contexts, there might be too much joint execution and too little delegation if the agent is very efficient. Overall, the inefficiency created by moral hazard under delegated and joint execution is much less important than that created by the principal's ability to engage in project hoarding and not form a team. Managerial Implications: The problem of under-delegation should really be framed as a problem of project hoarding, i.e., principals do not partner enough. Moreover, it is only relevant within - and not between - organizations. When principals partner with an agent, they might delegate too much if agents are inefficient or contribute too much if agents are efficient. Although the principal-agent and team-production literature have essentially focused on setting incentives for effort exertion within a given operating mode, a more critical issue appears to induce principals to form a team (or not), leading to inefficient operating modes.