Abstract

We consider group formation with asymmetric information. Agents have unverifiable
characteristics as well as the verifiable qualifications required for memberships in groups.
The characteristics can be chosen, such as strategies in games, or can be learned, such
as skills required for jobs. They can also be innate, such as intelligence. We assume that
the unverifiable characteristics are observable ex post (after groups have formed) in the
sense that they may affect the output and utility of other agents in the group. They are
not verifiable ex ante, which means that prices for memberships cannot depend on them,
and they cannot be used for screening members. The setup includes problems as diverse
as moral hazard in teams, screening on ability, and mechanism design. Our analysis,
including the definition of equilibrium and existence, revolves around the randomness
in matching. We characterize the limits on efficiency in such a general equilibrium, and
show that a sufficiently rich set of group types can ensure the existence of an efficient
equilibrium.

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