Discussion Papers 745

3 Predictions

which implies the profit:

t

Π ' = -e .'

ⁱ2 ^j with i = 1, 2 and j = 3 - i.

As t > p, it follows that ei' > ei* and Πi' > Πi*. Thus, we have a Pareto-optimal solution for the
effort game in which both players choose team remuneration and the effort ei'.

3 Predictions

We develop a number of theoretical and behavioral predictions to be tested in the experi-
ments.

Prediction 1: Participants do not choose the team remuneration mode when it is in their
egoistic self-interest to choose private remuneration.

This follows directly from the subgame perfect equilibrium prediction derived above.

Prediction 2: Under private remuneration, participants choose the optimal effort level.

Under private remuneration, participants make an individual decision without strategic inter-
actions. Their profit-maximizing effort can be directly read from a table in the instructions,
which provides the respective cost and profit for each effort level (see Appendix).

The following three behavioral predictions relate to cases in which, contrary to the theoretical
prediction 1, both participants have chosen team remuneration.

Prediction 3: Under team remuneration, participants choose an effort above the equilib-
rium prediction.

Under team remuneration, participants are in a decision situation that is strategically equiva-
lent to making a voluntary contribution to the provision of a public good. Over-provision
relative to the dominant strategy prediction is a stylized fact (e.g., Ledyard 1995).

Prediction 4: Participants choose higher team effort under voluntary teaming than under
enforced teaming where participants do not have the choice of private remu-
neration.

This is due to a forward-induction argument (Kohlberg and Mertens 1986, Cho and Kreps
1987, Van Damme 1989) rather than the backward-induction argument on which the subgame

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