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Team Diversity and Incentives

This paper analyzes how the degree of task-related team diversity influences the team outcome. The focus is on a novel benefit of team diversity that does not depend on complementary skills or mutual learning. We consider a multiagent setting where the employer makes use of career competition to motivate the team. Our analysis reveals incentive effects that do not exist in the well-studied case of teams of size 2. In teams with more than two members, diversity may have a positive effect on the efforts of some members although diversity leads to unbalanced career competition. As a consequence, expected profits are higher under a moderate degree of diversity compared with a situation with completely homogeneous agents. This result shows that the employer prefers a positive degree of diversity for pure incentive reasons. This paper was accepted by Suraj Srinivasan, accounting.