Why Informationally Diverse Teams Need Not Form, Even When Efficient

In recent decades, research organizations have brought the "market inside the firm" by allowing workers to sort themselves into teams. How do teams form absent a central authority? We introduce a model of team formation in which workers first match and then produce correlated signals about an unknown state. While it is efficient to maximize the number of informationally diverse teams, such teams need not form in equilibrium. Our analysis identifies the two sources of matching inefficiency: (i) workers may form diverse teams that are beneficial to its members, but force excluded workers to form homogeneous teams, and (ii) even when a diverse team is efficient, a worker may prefer to join a homogeneous team if she can exert less effort than her teammate. We completely characterize each inefficiency, discuss contracts that restore efficiency, and relate these contracts to observed management practice