Limiting the leader: Fairness concerns and opportunism in team production

Abstract

We use a laboratory experiment to investigate the extent to which leaders—faced with opportunistic incentives—employ monitoring to improve team production. Participants are assigned to teams, with one person appointed as the leader. The leader has the power to commit to a monitoring option, which replaces the default equal sharing rule with one that distributes team revenue in proportion to individual investments. Additionally, the leader can announce a claim to a portion of the team revenue, which is paid before shares are distributed. The resulting game possesses multiple equilibria involving monitoring and full investment, characterized by the largest claim the non-leaders are willing to tolerate by the leader. We appeal to behavioral considerations of fairness that help to form sharper predictions that pivot around the notion that non-leaders limit the leader to a ‘fair claim’. In the experiments, leaders are only moderately successful at increasing team production as they claim too much or forgo the monitoring option too often, especially when it is costly to monitor. Still, when there is no cost of monitoring, nearly half of the leaders successfully increase team production towards full investment, by relying on constant monitoring and resisting the temptation to issue unfair claims. These results highlight the potential for opportunistic incentives to undermine efficiency-enhancing leadership, even when the leader can commit to her decisions.