Teams, Career Horizon Diversity, and Tacit Collusion

We study optimal team design for multiple agents with possibly heterogeneous expected career horizons (i.e., discount factors). A principal assigns four agents to two teams, creating either homogenous teams by assigning the two agents with shorter horizons to one team and the two agents with longer horizons to a second team or heterogeneous (diverse) teams by mixing horizons within each team. The optimal team composition and explicit contract specified by the principal set the stage for implicit contracting between agents—to motivate desirable implicit contracting (mutual monitoring) and to prevent undesirable implicit contracting (collusion). When all agents have relatively short horizons, the contract is designed to motivate mutual monitoring that prevents free-riding, and homogenous and diverse teams perform equally. When the agents have relatively long horizons, collusion becomes a pressing concern, and diverse teams are optimal. In this case, both the optimal contract and the agents’ binding collusion constraint are asymmetric and interdependent. We view our model as providing a new theory that helps explain both observed diversity in team assignments and diversity in pay-for-performance sensitivity.