You, Me, or We? Co-Productive Principal-Agent Dynamics (Revision 3 )

Problem Definition: Projects are often initiated by a single person—a principal—who then decides whether to form a team by sharing project value with an agent. We ask: when does a principal form a team, and which operating mode emerges in equilibrium—single execution by the principal, delegated execution to the agent, or joint execution? Methodology/Results: The authors consider a co-productive principal-agent model with endogenous team formation. In the second-best, joint execution is less frequent than optimal, whereas both single and delegated execution are chosen too much. With a linear contract, common with non-financial output (credits, coauthorship) or in entrepreneurial ventures, there is too much single execution, i.e., the principal does not form a team often enough, and either too little joint execution when one of the workers has low productivity, or too little delegation otherwise. Overall, the inefficiency in project execution (due to moral hazard) appears less severe than the inefficiency in the principal’s team formation decision (due to project hoarding). Managerial Implications: Managerial under-delegation fundamentally stems from project hoarding; that is, principals do not partner enough. When principals choose to form a team, they then might delegate too much; paradoxically this happens when agents have low productivity. While the existing literature focuses on eliciting agent effort for a given operating mode, our analysis suggests the decision to form a team (or not) is a more critical issue.