In this article, we empirically analyze the effect of team characteristics on a team's choice of group contract type (its governance structure) and examine the combined impact of team characteristics and the group contract choice on group and individual performance in a classroom setting. We utilize endogenous dummy variable models in both group-level and individual-level analyses due to the expected endogeneity of the contract choice. The estimation results confirm a statistically significant positive effect of a governance structure, democratic contract that includes a mechanism to punish free-riders on both group and individual performance. We also estimate switching regression models to account for the possible heterogeneous treatment effects but do not find any significant difference between the treated and the nontreated in the effect of the democratic contract option implying that the contract choice is not necessarily motivated by its performance-enhancing effect.
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