Demographic Diversity and Collusion in Teams

We study optimal workforce and contract design for a firm that employs a team of two agents. The agents have possibly diverse demographic characteristics captured by their discount factors. When both agents have relatively low discount factors (impatient agents), the optimal contract is designed to foster cooperation, whereas when both agents have relatively high discount factors (patient agents), the optimal contract is designed to both foster cooperation and prevent collusion. In preventing collusion, the principal optimally targets the less patient agent by offering him higher-powered incentives, while the more patient agent is offered lower-powered incentives to promote cooperation. Offering high-powered incentives to the less patient agent, who is also less susceptible to collusion, makes it costlier for the more patient agent to bribe the less patient agent into colluding. The optimal workforce is a diverse one consisting of one agent with the highest discount factor and a second agent with a discount factor that is just low enough that both agents can be offered cooperative incentives without inviting collusion. We also study optimal team design for four agents with given discount factors—two with low discount factors and two with high discount factors—who are to be assigned to two teams and identify conditions under which diverse assignment is optimal.

This paper was accepted by Ranjani Krishnan, accounting.

Funding: J. Glover acknowledges financial support from the George O. May Professorship in Financial Accounting at Columbia Business School. E. Kim acknowledges financial support from the PSC-CUNY Award [Cycle 55], jointly funded by the Professional Staff Congress and The City University of New York.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.00855.