The Role of Managerial Work in Market Performance: A Monopoly Model with Team Production

Abstract

A monopolist is treated as a nexus of contracts with team production. It has one ownermanager who is the employer of two employees. A team production problem is present if the employer is a "managerial lemon." If the team production problem is solved, the employer is a "managerial hotshot." Both managerial hotshot and managerial lemon are found to make profit.Therefore, managerial slack can exist in our monopoly market. Whereas the employer has the incentive to improve management capability in principle, the employees have the incentive to keep management capability low. Moreover, the cost of improving management capability may be prohibitively high. Consequently, managerial slack can persist. The predicted behavior of the monopolist contradicts the neoclassical prediction of market performance in both cases.