Third-Party Budget Breakers and Side-Contracting in Team Production

Abstract

In a team production problem with unverifiable effort, budget breaking is essential to implementing efficient levels of effort. This short paper considers the use of a third party, who does not exert effort, in a setting with general contracts that can include message games, as a way to remove resources from the team. We show that if side contracting can influence behavior in a message game in the original contract, the addition of the third party is not helpful. Additionally, we compare our view of side contracting with that of Baliga and Sjostrom (2009) to explore the nature of side contracting that is needed in order for the third party to be useful for budget breaking.