A new solution for the moral hazard problem in team production

Abstract

We propose an intergroup competition scheme (ICS) to theoretically solve free-riding in team production and provide experimental evidence from a voluntary contribution mechanism (VCM) public goods game. The ICS includes an internal transfer payment from the lowest to highest contributing team proportional to the difference in group contributions. The ICS requires minimal information, makes the efficient contribution a dominant strategy and is budget balanced. These features make the ICS ideally suited to solve the moral hazard problem in team production. Our experiment demonstrates that the ICS raises contributions to almost reach optimality with appropriate parameters. We also show experimentally that the success of the ICS can be primarily attributed to the effect of higher returns and to the introduction of competition, and is not due to the introduction of potential losses or information regarding other groups.