Moral Hazard in Sequential Teams

This paper considers a team in which production takes place sequentially and in which agents observe the actions taken by previous agents. We show that for such teams sharing rules exist which are balanced and induce efficient production as the unique equilibrium outcome. This in contrast to team structures studied by Holmström (1982) in which agents act simultaneously. The sharing rule which induces efficient production is simple, intuitive and robust to noise, sabotage, and collusive behavior. It induces efficient production even when agents obtain imperfect information about previous actions.