Marginal Productivity Analysis in Teams

Alchian and Demsetz [Am. Econom. Rev. 62 (1972), p. 77] argued that when output is produced by a team, the cost of ascertaining marginal products may be so high that the payment of marginal product will be approximated by metering input effort. This paper shows that the payment of marginal product in a team setting was really never an open question and clarifies an important distinction between the practical difficulties associated with ascertaining marginal products in a team setting from the fundamental impossibility of doing so for inputs between whom a team synergy emerges. The implications this distinction has for theory and empirical work is then discussed.