Optimal Decentralized Group Formation

Dorothea K Herreiner, Economics Department, Bowdoin College

Abstract:
Imagine a firm which relies on production or design teams. Often there are many groups working on a similar or the same project contemporaneously but independently of each other. All groups need the same knowledge and capabilities to succeed. If the firm does not want to assign workers to specific groups, workers have to form groups on their own. The properties of such a process and the incentives the firm can give to achieve optimal group formation are discussed in this paper.
In more formal terms: a population of fixed size consists of agents of different types. These agents form groups such that each group has exactly one person of each type. A decentralized group formation procedure is investigated in which agents have to find their matching partners themselves. The paper characterizes the type distribution in the population which maximizes the expected number of groups that form for any group size.

Keywords: Matching, Search, Decentralized Markets
JEL Classification: C78, D40, J64

Current Version: February 2002.