From Team Production to the Analysis of
Organization
preliminary draft – comments welcome
Didier CHABAUD
THEMA-Management (U. Cergy-Pontoise)
& ATOM (U. Paris I) – GRJM (Paris XI)
Didier.Chabaud@eco.u-cergy.fr
1. Introduction: A double
question

Empirical question: How can we
understand the spreading of teams in
firms?

Research question: what can say
economists on work organization?
1.1. Empirical question (1): a
shared observation
Teams are increasingly used in firms
 Osterman [1994, 2000]

– 5% of US firms use extensively teamwork
in 1989,
– 40% in 1994
– 57% in 1997 (i.e. majority of employees
are in self-directed work teams)
1.1. Empirical question (1): a
shared observation

Teams’ introduction is generally
accompanied by other organizational or
HRM changes,
– Like group incentive pay, profits sharing,
TQM, JIT inventory techniques…

organizational changes seem to be
complementary
– Ichniowski et alii [1997], McDuffie [1995],
Boning Ichniowski, Shaw [2003]
1.1. Empirical question (2): The polysemy
of « teams »

« Teams » refer to different empirical realities
– Teamwork
– Diversity of nature of the teams:
•
•
•
•
project teams,
cross-functional teams,
problem-solving teams, quality or kaizen circles,
productive teams
– Diversity of content : role, responsibilities, internal
organization…
, self-directed work teams :small groups of workers who
have authority to determine internal processes to
generate a specific group product, service, or decision.
• Japanese Teamwork… to transplants.
• Swedish (Semi autonomous workgroups)
– And, even, international disparities in spreading
1.1. Empirical question (2): The
polysemy of « teams »

But everything will be synthesized under the
« team » term…
 Because of the common points : teams are
formal (partially) autonomous workgroups
with some joint production or, at least, focus
on collective production rather than individual
measure of performance
 So, be careful…
1.1. So, Empirical question (3): How can we
understand the spreading of teams in firms?

Teams are efficiency-enhancing:
– Improve learning,
– Improve flexibility, adaptation to environment
changes
– Improve productivity

Teams are fashionable, they symbolize
empowerment…
 So, we wait for « team-based organizations »
and no more hierarchies…
1.2. And the research question: what can say
economists on teams?

A lot of things… one can imagine (...)
1.2 Teams and Economics : A
long long story (1)

Economists have (probably) been
among the first to talk about teams
– Cf. the Team theory of Marschak &
Radner [1954-1972 ]
1.2. Teams and Economics: A
long long and diverse story (2)







Different conceptions:
The organization seen as a team (Marschack
& Radner),
The team production as the basis for firm
(Alchian & Demsetz)
The team as an object of study (Holmström)
The team as an organizational device (Aoki)
… But, are they talking of the same thing?
..........are they useful to undertand our
empirical question?
1.2. Teams and Economics :
Diverse conclusions (3)

Some paradoxical conclusions?
 Williamson [1980], comparing Peer Group
and Hiearchy…
 Beckman [1989] concluding that « teams are
inefficient », whereas Beckman [1995]
concludes that « quality circles » and
« vorstand » are more efficient than
hierarchy…
 Lazear [1998] shows team efficiency when
teams combine complementary resources,
enable increase in specific capital or transfer
of knowledge
1.3. Objective: To show how different
conceptual constructs have been elaborated
and can contribute to understand teams’
spreading

Contrast different alternative theories and
stress their logical or empirical flaws

following two (sub-)objectives:
– To show how different research strategies over the
same object « the team »
=> convey interesting results,
– Discuss their usefulness when one wants to
understand internal structure of the firm
To do so,
We will contrast differents theories of
teams, shedding light on:
 The team as a coordinating device,
 The team as an incentive device
 The team as an organizational device

2- The Team as a coordinating device

The seminal work: Marschak & Radner

Research questions and results

Some extensions

Some comments
2.1. The Seminal Work: Marschak & Radner
[1954-1972]

An organization in which the members have the
same interests and beliefs but do not share the
same information [1972 : ix]

=> the problem will be to maximize:
E[U ( s )]    ( s ) U ( s )   ( ,  ,  )
s
– α: decision function of the team
– η : the information structure of the team
– Ø : the set of environment states
2.2. Research questions and
results
An interesting tool in order to assess:

What is the optimal decision function,
according
– The Information structure (and its costs)
– The abilities of agents
–…

What is the optimal information structure,
taking account the informations costs…
2.3. Some extensions

Crémer [1990, 1993] uses team theory in
order to study corporate culture… and the
choice between
– information sharing
– complementarity of information

Radner, Marschak & Van Zandt, use team
theory in order to analyze hierarchical
architecture
2.4. Some comments
An interesting simulating tool
 But what about empirical evidence?
 In fact, Team is a natural construction :
there is no question about its creation
decision…
 Also, one can wonder about incentive
dimensions…

3- The Team as an Incentive Device

The seminal work: Alchian & Demsetz
[1972]

Some Debates and Solutions

Two kinds of Extensions
3.1.The seminal work: Alchian &
Demsetz [1972]

There is a team when production is not
separable
2 Y
XiXj

0
« There exist production techniques in
which the output obtained is greater than if
Xi et Xj had produced separable output »
So, there is a team when:
1) several types or resources are used,
 2) the product is not a sum of separable
outputs of each cooperative resource.
 3) Not all resources used in team
production belong to one person
 Alchian & Demsetz [1972: 779]

Alchian & Demsetz [1972]

A pathbreaking paper which suggests a
theory of the firm and emphasizes:
 The cruciality of:
– nonseparabilities, indivisibilities,
– metering activitities,

and so, of:
– shirking (or free riding),
– Monitoring activities,
– And of residual rights allocation in order to prevent
inefficiencies.
3.2. Some Debates and Solutions:
Alchian & Demsetz perspective

Alchian & Demsetz insist together on the role
of :
– Metering and Monitoring activities
– The allocation of residual right

Which would lead to study
– Parameters that define control (or metering)
efficiency,
– And specially, the role of « controlling technology »

Followers have essentially focused their
analysis on incentives
3.2. Some Debates and Solutions:
Followers perspective (1)

Holsmtröm [1982] suggests « a simpler
solution » to the team problem…
– With a third party acting as residual claimant and
« breaking the budget »
– (each member « pays » the principal a security
deposit in order to work…)
– Simpler? Yes (for Holmström) as the third party do
not need to observe /monitor the team members
(only to observe team production)…
3.2. Some Debates and Solutions:
Followers perspective (2)

After few technical debates
– Specially Eswaran et Kotwal [1984] emphasize
the risk of collusion between third party and
some team members.

MacAfee & MacMillan [1991] show that
it is possible to define a payment rule
that prevent moral hazard and adverse
selection, and enables a first rank
optimum…
3.2. Some Debates and Solutions:
Followers perspective (3)





Stimulating but…
what about reality?
One can understand that a few technical
works will be made in order to generalize the
perspective and obtaining first-best solutions.
Neverhteless, regarding our empirical
question, one can argue that these first best
models do not explain the phenomena…
=> SO, What alternatives do we have?
3.3. Two other kinds of Extensions

In fact, two sets of work seem
interesting to emphasize on this topic:
– The one relates to the objective of team
models
– The second relates to the incentives
problems due to team structure
3.3.1. Extensions(1): Aoki

[1994]
Point of departure : assuming that
assumptions irrealism prevents
understanding of teams operating
– => a second best solution

Objective: understanding the control of
teams (Team is composed of n
members and 1 manager).
External controller
can observe the production
has the right to take the control
of the team, and to liquidate it
(i.e. to dismantle it)
=> CONTINGENT CONTROL
OF TEAM.
Manager
Can control opportunism of
members (at a cost)
promote cooperation
Team members
homogeneous
Results: Aoki shows that if:

1) members support a penalty during the dismantling
of the team (loss in value on the labour market),
 2) the remuneration of the members of the team is
contingent with the performance of the team
– then, the performance of the team reaches a second-best
optimum

=> This result leads Aoki to emphasize that:
– There is institutional complementarities between institutions
(labour market and capital market) and operating of teams.
– This contingent control of teams is analogous to Japanese
Main Bank System

And, if we do not really treat internal operating of
teams, we shed light on corporate governance of
organizations…
Some Comments
A stimulating transposition which
enables to shed light on corporate
governance…
 Still maintaining the advantages of
formalization

3.3.2. Extensions: Job design and
multitasking
A second extension can be drawn from
a different class of models : multitasking
models
 Seminal paper: Holmström & Milgrom
[1991]
 Followers
 What about practice?

Holmström et Milgrom [1991]

The problematic is easy to remember: what is
the impact of task nature on the form of
incentive scheme.
 Problem : each agent has different tasks to
accomplish, say:
– One easily observable
– One non observable (or costly to observe)

Consequence : incentive scheme impacts:
– Risk allocation & effort decision, but also
– The agent’s allocation of effort among the tasks
Two kinds of conclusions

Multitask needs to pay fix wages, in
order to prevent tasks substitution…
– (and conversely when there is task
complementarity)

Job design is crucial in order to
determine efficiency and form of
monetary incentives
And reflexions on the Job Design





According the nature of tasks:
Substituable tasks => Grouping tasks in job
according their nature (Itoh [1994])
Complementary tasks => grouping different tasks
improve efficiency (Itoh [1992, 1993])
Analysis of the nature of complementarity,
specially if there is inter-task learning (Lindbeck
& Snower [2000])
….
Some Comments

An opening research agenda
articulating
– Task nature (observability of tasks)
– Incentive properties of these
– And job design
And even elements on learning
 Discussing a great range of situations
 But remain limited on the coordination
dimension

4- The Team as an organizational device:
articulating coordination, incentive and skills
The informational theory of the firm,
exemplified by Aoki
 The complentarity way, exemplified by
Zenger
 A transaction costs way?

4.1. The Aokian way, an
informational theory of the firm
Team is a particular way of organizing
activities => So , the focus is on the
coordinating principles, which enables
to extend the previous models
 => The objective becomes to
understand the efficiency parameters of
each form of organization.

– Its depends on environment uncertainty
4.1. The Aokian way, First result

First Duality Principle: “In order for firms
to be internally integrative and
organizationally effective, either their
coordination or their incentive mode
needs to be hierarchical, but not both”
(Aoki [1990a : 14-15]).
4.1. The Aokian way, First result
H model
J model
Coordination
Centralized
Decentralized
incentives
Decentralized
Centralized:
Rank
Hierarchy
4.1. The Aokian way, First result
Coordination
Nature of skills
incentives
H model
J model
Centralized
Decentralized
Standard
Specific
Decentralized
Centralized:
Rank
Hierarchy
4.1. 3 Modes of information
connectedness
(Aoki [2001])
4.1. That can be combined
T1 γ1
2possible
vert. Inf.connect. mode
:
- HD
- IA
T2
T2a
γ2a
T2b
γ2b
2 possible horiz. Inf. connect. mode
:
- IE
- IA :
IA(n)
IA(c) inf. shared by direct communication
HD : hierarchical decomposition, IA : information assimilation, IE : information encapsulation
From Parthenay [2004]
4.1. To obtain a Typology of Organizational & QuasiOrganizational Architectures
Treatment of
Global info.
Local info.
Hierarchical
(HD)
encapsulated(IE)
Functional
hierarchy
assimilated
(network induced)
Functional
hierarchy
integrated
network
Strongly
assimilative
Silicon Valley
by
Hierarchically
controlled teams
(AD team)
Assimilated
(contextual)
weakly
assimilative
Participative
Hierarchy
(German
team)
Japanese
Keiretsu
Horizontal
Hierarchy
(J team)
Italian
industrial
district
4.1. Interest

A basis to discuss

The cruciality of information treatment

A complete picture of organizational forms
– A discussion of their efficiency
– The connection between coordination and
incentive considerations
– The connection between institutional and
organizational considerations
4.1. A reducing view?

Stylized facts are always a matter to
discuss…
 But do they forget critical dimensions of
analysis :
– Underestimate the nature of skills?
– Underestimate the diversity of organizational
devices, which combine principles of coordination
on line, off line tools, management tools
(measurement and reporting tools, TQM…)

It depends of:
– The objective of analyst (efficiency of org. or
choice of tools)
–…
4.2. The complentarity way:
Zenger

A good idea: transpose supermodularity
concepts to the analysis of organization, the
analysis of complementarities
– Interest: understanding the diversity of empirical
situations
– Critic: an implicit theory of the firm or no theory of
the firm

What factors explain the complementarity.
Can we only say that complementarity is a
matter of fact, or don’t we need a theory that
render for complementarity?
4.2 « Crafting internal hybrids », Zenger [2002]
Traditional Hierarchy
Functional
Structure
Common Change Initiative
Structure: Autonomous Work Teams
Team-based Hierarchy
Cross
Functional
Teams
Measurement: TQM
Indiv. Input
Measures
Low-powered
Indiv. Rewards
Team Output
Measures
Incentives: Group
-based Pay
High-powered
Team Rewards
Traditional
hierarchy
Structure
Measurement
Incentives
Team-based
hierarchy
Functional
Structure
Cross
Functional
Teams
Individual input Team Output
measures
measures
Individual
rewards (low
powered)
Team Rewards
(high powered)

Interesting in its principle, this view coin
the complementarity between
organizational devices, but lacks a
theory of the firm?
4.3. Put it all together… Zenger
Kind of
measurement
Structure
Nature of
incentives
4.3. Put it all together… Zenger
Indiv. input
measurement
Funct. Hy
Individual
incentives
Team-based
hierarchy
Coll. Output
Measurement
Collective
incentives
4.3. Put it all together… Zenger
& Aoki
Indiv. input
measurement
Funct. Hy or
centr. Coord.
Individual
incentives
Team-based
Hierarchy or
decent. Coord.
Coll. Output
Measurement
Collective
Incentives
+
Indiv.
Long term incent.
4.3. Put it all together… Aoki + Zenger
What is lacking?
Indiv. input
measurement
Funct. Hy or
centr. Coord.
Standard skills
Skills
Team-based
Hierarchy or
decent. Coord.
Individual
incentives
Coll. Output
Measurement
Specific skills
Collective
Incentives
+
Indiv.
Long term incent.
Put it all together… Aoki + Zenger
What is lacking?
Responsibilities
Funct. Hy or
centr. Coord.
individual
Standard skills
Skills
Team-based
Hierarchy or
decent. Coord.
collective
Specific skills
Indiv. input
measurement
Individual
incentives
Coll. Output
Measurement
Collective
Incentives
+
Indiv.
Long term incent.
Put it all together… Aoki + Zenger
What is lacking?
Indiv. input
Responsibilities
Funct. Hy or
centr. Coord.
individual
Standard skills
Skills
Team-based
Hierarchy or
decent. Coord.
collective
Specific skills
Parameters of Production
Process
measurement
Individual
incentives
Coll. Output
Measurement
Collective
Incentives
+
Indiv.
Long term incent.
Put it all together… Aoki + Zenger
What is lacking?
A study of determining factors of
relationships…
 And specifically

– Characteristics of Skills
– Characteristics of production process

So, why not
– using Aoki toolbox or
– going back to TCE???
To conclude:
Several ways about teams

Modelize from a simple stylized fact
– Team theory
– Team production
– Multitasking

Try to connect several dimensions
– Aokian way
– Complementarity way
– TCT way

But a lot of empirical and theoretical
questions remain on the research agenda,
leading to connect economics and theory of
organizations
Remarks
4.3. The transaction costs way?
Few things on internal organization of
teams in TCE, even if
 Williamson [1975] wanted to provide an
« internal study of organizations »…


A study of
determining factors
of relationships…
 And specifically
– Characteristics of
Skills
– Characteristics of
production process


What about the role
of asset specificity?
Human asset
specificity
 Temporal specificity
Some Elements to discuss (Chabaud [2000])
Human asset
specificity
Temporal spe.
Low
High
Low
High
Taylorian version
of hierarchical
organization
H1
Swedish
organization
S
Fordian version of
Hierarchical
organization
H2
Japanese
organization
J
To conclude: What’s going on
here?