Mutual Monitoring in Teams: The Effects of Residual Claimancy and Reciprocity

Monitoring by peers in work teams, credit associations, partner- ships, local commons situations, and residential neighborhoods is often an effective means of attenuating incentive problems. Most explanations of the incentives to engage in mutual monitoring rely either on small group size or on a version of the Folk theorem with repeated interactions. We provide an explanation of mutual monitoring in single shot interactions among members of large teams. A key element of our approach is that when team members are residual claimants, some members are motivated by reciprocity norms to punish fellow members when they shirk. We provide evidence for the behavioral relevance of reciprocity norms and we explore the effects team size and the structure of information among team members on the efficacy of mutual monitoring. We conclude with some results specifying conditions under which mutual monitoring in teams provides an effective solution to incentive problems arising from incomplete contracting, as well as conditions under which mutual monitoring is likely to fail.