Mutual Monitoring versus Incentive Pay in Teams

Radoslava Nikolova
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Radoslava Nikolova: Crest

No 2005-39, Working Papers from Center for Research in Economics and Statistics

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.

Pages: 36
Date: 2005
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