Formation of Teams in Contests: Tradeoffs Between Inter- and Intra-Team Inequalities

We examine a team contest in which players exert effort to compete against other teams for a prize, which is then divided among the members of the winning team according to a specified sharing rule. Assuming that players vary in their observable abilities to contribute to team performance, we study the structure of stable teams under different sharing rules. A head-hunting attempt is successful if the targeted player benefits from switching teams and the offering team’s probability of winning increases as a result. A team structure is defined as stable when no such successful head-hunting opportunities exist. We show that when all teams adopt an egalitarian prize-sharing rule, complete ability sorting arises, resulting in the greatest inter-team inequality. In contrast, when teams use substantially unequal sharing rules, the stable team structure features lower inter-team inequality but greater intra-team inequality. These results reveal a trade-off between intra-team and inter-team inequality in the formation of stable teams.