Optimal Team Composition: Diversity to Foster Mutual Monitoring

We study team design. In our model, a principal assigns either heterogeneous agents to each team (diverse teams) or homogeneous agents to each team (specialized teams) to perform repeated team production. Implicit/relational incentives for working that team members can provide to each other through mutual monitoring favor diverse team assignment. Moreover, if specialized teams exhibit a productive substitutability (e.g., interchangeable efforts with decreasing returns to total effort) while diverse teams exhibit a productive complementarity (e.g., cross-functional teams that create synergies), then specialization creates an opportunity for tacit collusion within the team that does not arise under diverse team assignment. We use our results to develop empirical implications for team composition, pay-for-performance sensitivity, gender/age diversity, and team tenure.