No. 182: Soft Information, Career Concerns, and Team Design

We study the impact of soft information on the configuration of teams. In the model, the agents have explicit incentives to exert effort based on performance-dependent compensation contracts and implicit incentives to exert effort based on career concerns. In the case of uniform teams, the principal assigns agents with similar abilities to a team. In contrast, in the case of diverse teams, the principal assigns agents with different abilities to a team. We find that the characteristics of the available information are important determinants of optimal team design. For example, when only hard information about agent abilities is available, the principal tends to favor uniform teams. Conversely, when soft information about agent abilities is also available, the principal tends to favor diverse teams when the agents’ efforts significantly impact firm performance. Our study contributes to the growing body of literature that illuminates the interrelations between incentives, information, and organizational design.