The synergy paradox

Complements go together, and this intuition has been applied to the allocation of tasks within an organization and to the choice of team members (see Brickley et al., 2009 for example). This reasoning also underlies the prediction in the property-rights model that complementary assets should be owned together (Hart and Moore, 1990, Hart 1995). In contrast, this paper presents a model in which complementary assets or workers should not always be used together.

   Consulting companies often rotate team members, possibly forgoing the understanding that build up between workers overtime; and in Broadway shows, too many incumbents – as opposed to newcomers – decrease the likelihood of a production’s success (Uzzi and Spiro, 2005). Airlines integrate a permutation constraint in their cabin crew assignment algorithm that prevents familiar pilots to be assigned together on the same flight. But familiar workers are likely to be complementary – for instance, they can probably communicate more easily. Why do these airlines choose to explicitly forgo this synergy?

   In an incomplete contract setting, we propose a simple model that makes explicit a mechanism by which the whole can be worth less than the sum of the parts, even in presence of complementarities. For a given level of effort, complementary agents will produce a higher level of surplus – the synergy effect. But if the additional value of matching complementary agents together is decreasing in their effort, that is, the synergy is decreasing in effort, agents put less effort if they are complementary – the effort effect. In other words, crew that know each other well have a lower incentive to put in effort (checking and cross checking and so on) than when teamed up with a stranger. And with lower effort, the outcome (in terms of safety incidents) could be worse when complementary agents are paired together, despite the natural synergy.

    We show the conditions under which the effort effect dominates the synergy effect, leading the firm to use independent rather than complementary workers. We also highlight the cases where welfare is maximized with independent rather than complementary workers. This is the synergy paradox. We discuss the implications for team allocation, job rotation, centralization versus decentralization of decision making, asset ownership, and mergers.