In this course, the problem sets were done in a team setting in order to illustrate some principles of team compensation and team incentives. There are a number of points that come up, which are listed below.

        1. Team compensation matters. Individuals worked hard to produce results and argued with one another about answers, because they knew that they received their score based on the team score.

        2. Team compensation induces peer monitoring. Because an individual's score was based on the team performance in addition to individual performance, each team member monitored his peers. People made sure that the writeup was correct and hovered over the scribe. Thus team compensation can motivate some amount of peer monitoring.

        3. While team compensation matters, individual compensation matters the most. The strongest incentives were provided to individuals by voting of their peers. Each student wanted to look good in front of his or her peers because compensation depended on it. This is what motivated individuals to take sufficient care to prepare answers even before the problem session was held.

        4. The size of the group matters. Too large a group means that it is very difficult to communicate with one another and to get things done. But too small of a group means that there are not enough public goods to take advantage of. When the group size is very small, it becomes much less likely that one of the partners will know how to solve the problem. If the group size is very large, it is almost certain that at least one knows how to solve the problem, but he will have a difficult time communicating the solution to his peers. Additionally, as the team size gets large, free rider effects become more problematic.
 
        5. Changing the members of the team is useful for two reasons. First, since individuals have different pieces of knowledge, changing the members with which one is associated will permit workers to learn from one another most quickly. Since diminishing returns set in, it is better to spend time with a new person than to spend additional time with an old person. Second, by moving people around and putting them in other activities, one can learn more about individual abilities. This is the principal behind try-outs in crew where members of the boat are switched. It also lies behind firms that try new workers out in many different activities, which would otherwise only reduce the gains from specialization.

        6. Judging others must be compensated. It is necessary to compensate students on their ability to pick winners, because otherwise they will vote strategically. Rather than vote for the best person, a student will be tempted to vote for one who will have the least detrimental affect on his own grade. Supervisors must be compensated not to suppress potential rivals. Thus, life insurance companies sometimes pay managers on the basis of subsequent sales made by individuals whom they trained who later become managers.

        7. Cooperation is only within teams, and there is competition across teams. Thus the way that a team is defined will determine who cooperates with whom. Since the grade is based on the team's performance relative to another team, team A wants team B to do badly, but member 1 of team A wants member 2 of team A to do well.

        8. The voting rule matters. If only the best students in the class receive different prizes from everyone else, then most people would give up, thinking that they had a very small chance of receiving the top number of votes in the class. Thus, too skewed a prize structure can stifle incentives.

        9. Because it is difficult for me to monitor what goes on in the team, it is necessary to set up a team compensation scheme so that peers evaluate one another.