On the Value of Demographic Diversity in Teams

We study optimal team design (homogenous vs. diverse assignment) and explicit contracting in a setting with multiple agents who have possibly diverse demographic characteristics captured by their discount factors. When the agents have relatively small discount factors, the contract is designed to foster cooperation. In this case, either team assignment is irrelevant or homogenous assignment is optimal. The reason that homogenous assignment can be optimal is that diverse assignment complicates the provision of punishments used to deter free-riding. When the agents have relatively large discount factors, the contract is designed to prevent tacit collusion while motivating cooperation. In this case, diversity in the agents’ implicit incentives creates a latent benefit: the principal targets the less patient agent with higher-powered incentives to combat collusion, while the more patient agent is induced to cooperate using lower-powered incentives. We also study optimal workforce design (all patient, all impatient, or a mix of patient and impatient employees) by allowing the principal to choose discount factors of her employees and identify conditions under which each type of workforce is optimal