Competitive effort determination with heterogeneous workers and team production

We consider a competitive labor market with purely firm-specific differences in workers’ disutilities of productive effort, firms’ outputs depend on the joint efforts of many workers, and individual worker characteristics cannot be directly observed by firms. Firms compete in ex ante contracts relating workers’ rewards to overall output, offered prior to the production period. Under assumptions similar to those made by Holmström (1982), we demonstrate that a first-best effort allocation, requiring more productive workers to put up greater efforts than less productive ones, can then be implemented by firms paying the same wage to all workers. Differential worker productivities then imply no adverse selection problem, and no distortions.