Formation of teams in contests: tradeoffs between inter- and intra-team inequalities

We consider a team contest in which players make efforts to compete with other teams for a prize, and players of the winning team divide the prize according to a prize-sharing rule. Assuming that players differ in their abilities and their abilities are observable, we analyze which team structure realizes by allowing players to move across teams. A team structure is stable if there is no successful head-hunting opportunity. We show that if all teams employ the egalitarian sharing rule, then the complete sorting of players according to their abilities occurs, and inter-team inequality becomes the largest. In contrast, if all teams employ a substantially unequal sharing rule, there is a stable team structure with a small inter-team inequality and a large intra-team inequality. This result illustrates a trade-off between intra-team inequality and inter-team inequality in forming teams.