Reputation Deals: a Theory of Endogenous Teams

This paper complements the traditional theory of teams (Fama (1980), Holmstrom (1982a,b)) by introducing endogenous team formation by agents who are concerned with their reputations and are informed about the types of their potential teammates. Such a situation leads to a tradeoff between joining a high-productivity type but a low-reputation partner. It is examined whether there are gains from trade, both, for the case of non-transferable and transferable utility, and what can be learned from reputation deals. Furthermore, a signaling model of teaming is developed that captures in a consistent way the process of information acquisition by the agents' strategic opponent, the market.N/