Analysis of team production, Managerial Economics

Q. Analysis of team production?

Harold Demsetz and Armen Alchian's analysis of team production is a clarification and amplification of earlier work by Coase. According to them, firm develops because extra output is provided by team production. Though, its success is conditioned according to propensity to manage the team. This takes in to account metering problems (it's expensive to measure the marginal outputs of cooperating inputs for reward purposes) and attendant shirking (moral hazard problem) that can be overcome by estimating marginal productivity by observing specifying input behaviour. Hence such monitoring is essential. Though this kind of monitoring can only be encouraged efficiently if the monitor is recipient of the activity's residual income (otherwise the monitor would have to be monitored, ad infinitum). So for Alchian and Demsetz, the firm, is an entity that brings together a team that is more productive working together than at arm's length through the market, due to informational problems associated with monitoring of effort. In effect, hence, this is a 'principal-agent' theory. Because it is asymmetric information withinthe firm, that Alchian and Demsetz emphasise, it should be overcome. In Barzel's (1982) theory of the firm, drawing on Jensen and Meckling (1976), firm emerges as a means of centralising monitoring and thereby avoiding costly redundancy in that function. 

The weakness in Alchian and Demsetz's argument, according to Williamson is that their notion of team production has quite a narrow range of application, as it presumes outputs can't be related to individual inputs. In practice, this may have limited applicability(small work group activities, the largest maybe a symphony orchestra), because most outputs within a firm (such as secretarial and manufacturing work) are separable so that individual inputs can be rewarded on the basis of outputs. Therefore, team production can't offer the explanation of why firms (in particular, multi-product firms andlarge multi-plant) exist.

Posted Date: 8/12/2013 2:51:15 AM | Location : United States

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