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Mutual Monitoring versus Incentive Pay in Teams

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  • Radoslava Nikolova

    (Crest)

Abstract

In a principal - multi-agent relationship, we derive the optimal mutualmonitoring - incentive pay mix. When the agents are better informed about theireffort choices than the principal, and when their information is sufficiently"good" there is a substituability between those two modes of providingincentives. However we show that the optimal mix depends on agents' liabilitylimit. When it is sufficiently slack the principal uses stronger incentive pay andless mutual monitoring. We also derive the conditions for adoption of costlymutual monitoring technology.

Suggested Citation

  • Radoslava Nikolova, 2005. "Mutual Monitoring versus Incentive Pay in Teams," Working Papers 2005-39, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2005-39
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    References listed on IDEAS

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    1. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
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    3. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-636, May.
    4. Paul Osterman, 1994. "How Common is Workplace Transformation and Who Adopts it?," ILR Review, Cornell University, ILR School, vol. 47(2), pages 173-188, January.
    5. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-190, March.
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