Research & Publications
Diseconomies of Scale in Employment Contracts
1990, Journal of Law, Economics, and Organization
Eric Bennett Rasmusen, Todd Zenger
We find that small teams can write more efficient incentive contracts than large teams when agents choose individual effort levels but the principal observes only the joint output. This result is helpful in understanding organizational diseconomies of scale and is consistent with both existing evidence and our own analysis of data from the Current Population Survey. Our modelling approach, similar to classical hypothesis testing, is of interest because we need not derive the optimal contract to show the advantage of small teams.
Rasmusen, Eric Bennett and Todd Zenger (1990), "Diseconomies of Scale in Employment Contracts," Journal of Law, Economics and Organization, Vol. 6, No. 1, June, 65-92.