Essays in Team Economics

This dissertation addresses teamwork with the tools of economics in three specialized settings--I examine (1) how teams form under discrimination, (2) what shareholders can accomplish for themselves and society when operating as group that they cannot as individuals, and (3) ethnicity's role in the performance of pairings between venture capitalists and entrepreneurs.<bold>Adverse Selection in Team Formation under Discrimination</bold>The decision to be an entrepreneur or an employee is among the most consequential any individual will ever face. Does race or gender influence that choice? Could discrimination affect occupational performance? Several empirical studies on occupational segregation suggest (1) minorities are more likely to choose (or be chosen for) occupations in which teamwork plays a minimal role and (2) that minorities excel in these individualistic positions. Teamwork and discrimination are fundamentally linked because while teamwork can be synergistic, it obscures team members' individual contributions: managers can try to infer unobservable individual contribution from observable characteristics like race or sex. Thus, a talented minority worker should choose entrepreneurship or other occupation where his individual accomplishments cannot easily be attributed to others, if doing so will make him better off. Could this self-selection sustain discrimination even if managers paid workers proportional to their expected ability; that is, according to their merit? This paper shows that it can. Furthermore, among those choosing to work as entrepreneurs or in other individualistic occupations, discrimination victims outperform beneficiaries. Since beliefs about discrimination influence which teams forms, discriminatory equilibria may be more productive than egalitarianism--the implications are discussed. The model presented here distinguishes itself in a rich literature on statistical discrimination, by explaining empirically observed behavior that has not yet been addressed, elucidating why the prescriptions derived from extant model have had limited success, and by enabling the analysis of additional forms of discrimination.<bold>Social Responsibility of Firms beyond Profits</bold>Corporate social responsibility (CSR) expenditures are often seen as a perquisite of the manager at shareholder expense or an indirect form of profit maximization. The former explanation creates an agency puzzle and ethical dilemma--who should/do managers work for? Empirical support for the latter explanation is mixed, at best. I highlight another possibility consistent with recent findings that absentee managed plants in the US emit more toxins, on average, than other plants (Grant, Jones and Trautner 2010). I develop a model in which a manager who maximizes shareholder welfare will optimally engage in CSR that leaves shareholders with less money. Furthermore, no behavioral motives, such as "warm glow" are required--instead, the familiar public economics framework of pure altruism is used; i.e. shareholders care only about their own private material consumption and their own private benefit from public goods, like clean air. In this framework, (1) a manager will provision more public goods, say by supporting environmental causes, from the profits of the firm than if the manager distributed all profits to shareholders as dividends and left shareholders to contribute in a decentralized manner on their own. (2) If the firm generates negative externalities, like pollution, the firm always produces less than the profit maximizing output. (3) If shareholders would have their manager contribute anything at all to the public good at the socially optimal level of production, the firm will, in fact, produce the socially optimal quantity and provision the public good, without intervention by a social planner. Thus, when this condition holds, government regulation to control the quantity produced by firms can do no better for society than a manager who works only on behalf of her shareholders. Reasons why this condition may be expected to hold in many real world settings are discussed. (4) Finally, when this condition holds, decreasing marginal production costs increase public goods as much as decreasing marginal externalities. This neutrality result implies that government subsidization of technology, which improves the cost-effectiveness of production, may yield cleaner air than subsidization of less polluting technology, if the former is cheaper to develop. The model also yields a number of distinct empirically testable hypotheses, including that, all else being equal, more widely held firms will engage in greater CSR than more closely held firms. At a broader level, the model reveals not only a novel explanation for costly CSR but that making managers more accountable to shareholders confers a social benefit.<bold>Can Birds of a Feather Fly Together?--Evidence for the Economic Payoffs of Ethnic Homophily</bold>How do ethnic networks influence venture capitalists' choice of companies to invest in, and the performance of the investments? We investigate this question by using data on the ethnic origins of over 22,000 U.S.-based V.C. partners and the 98,000 top-level executives of the startup companies they invested in during the years 1991-2010. We construct measures of "ethnic distance" for each potential VC-company pair and find that after controlling for the sorting of ethnic groups into certain industries and geographic areas, a 1% decrease in ethnic distance for the pair increases the probability of investment by up to 0.05%. Evidence for the influence of ethnicity is particularly strong during early-rounds of investment when information costs of the relationship are high, and for ethnic populations associated with "collectivist" cultures such as Japanese, Korean and Chinese. Conditional on investment, a 1% increase in ethnic closeness increases the probability that the portfolio company advances to successive rounds (the effect being strongest for the early rounds), and the probability of successful exits through IPO by 0.6-1.2%. This translates to a striking estimated ex ante increase in IRR between 7% and 15% for the average VC. We conclude that co-ethnic networks have a profound economic influence on venture investments.