The theory of the firm has emphasized the importance of some agents that coordinate the activities of others in organizations. This chapter presents a natural framework which formalizes this idea. It describes a model of team production with a moral hazard a la Alchian-Demsetz-Holmstrom. In order to credibly implement the collective punishments required to achieve the first best, an owner (residual claimant) is required. This owner brings about coordination through incentives embedded in contracts. The chapter shows that under borrowing or minimum wage constraints, even the existence of an owner may not guarantee the implementability of the (constrained) first best. Under such conditions, a welfare-improving solution can be achieved if an external agent coordinates the activities of the workers by directing them to certain actions, thus implementing a correlated equilibrium.
Keywords: theory of the firm; coordination; agents; moral hazard; Alchian-Demsetz-Holmstrom model; incentives; contracts; first best; team production; correlated equilibrium
Chapter. 8479 words. Illustrated.
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