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Image Concerns in Teams

Abstract: In this paper we analyze theoretically how social image concerns affect motivation problems in team production. One prominent feature of teams is mutualmonitoring. Under close teamwork it is likely that team members can observe their behaviors each other, and they care about how their intrinsic motivation toward team performance and extrinsic incentives to “do well” for themselves are evaluated by (some of) the other members. We first assume that all the agents are identical except for their "types," and derive a condition under which the average team effort per agent is increasing in team size. The condition identifies two positive effects of increasing team size on effort incentives. The first direct effect is that the agent cares more about his image concerns in larger teams because "more eyes" are observing his behavior. Second, even if the first effect is absent, the average team effort can still increase with team size because the weaker monetary incentives in larger teams raise the marginal reputational return to effort. Furthermore, these two effects interact with each other. We next classify the agents into two categories, "insiders" and "outsiders" and show that replacing insiders by outsiders may have positive incentive effects. The results explain why increasing the number of independent directors or hiring a new CEO from outside ("new blood") can have significant and positive effect on firm performance.